have been bailing out of the stock, and if history is any guide, so should you.
Over the past few months, insider selling at Franklin has gained momentum, suggesting an increased level of bearishness within the firm, according to Michael Painchaud, director of research, and principal at Market Profile Theorems, which tracks insider activity.
While insider sales aren't always a good gauge of future stock action, they have foreshadowed declines in Franklin's share price over the past two years, Painchaud said.
The selling is particularly interesting given that the firm has received a subpoena from the New York state attorney general in connection with his probe into the mutual fund trading scandal. The
Securities and Exchange Commission
also has requested information from the firm.
Franklin recently said that it has very strict policies against improper trading, and an internal probe hasn't uncovered any wrongdoing. Still, Painchaud's data suggest that insiders at the firm are bearish and "see risk in owning their own shares."
That doesn't mean federal regulators are about to uncover any misconduct. Some insiders might be concerned about the stock because it's had a nice run-up since July. Others might be selling to diversify their holdings or to raise extra cash. But the trades are notable nonetheless.
As of Nov. 1, Franklin had scored the lowest-possible mark on Painchaud's proprietary insider trading model. Painchaud assigns a score to companies he tracks based on seven factors, the most important of which is whether an insider actually bought or sold shares.
If the purchase or sale was particularly large, or if the individual conducting the transaction had been prescient in the past, the model gives extra weighting to those trades. A score of 1 suggests a very high level of insider selling, while 10 suggests a very low level. Franklin Resources recently scored 1.
The last time Franklin scored such a poor mark was in early December, when the stock was sitting at around $37. By early March, it had fallen to $31. Insider selling also started to ramp up in May and June 2002, when the stock was trading for more than $40. By July 18, it had fallen to around $33.
Other companies involved in the recent mutual fund scandals aren't flashing such obvious signals.
, which is under investigation by Spitzer and the SEC for failing to stop improper mutual fund trades, has actually seen more insider buying over the past few months, according to Painchaud. The firm scored 1 back in July and August but that number has since climbed to 7.
Marsh & McLennan
has also seen a slowdown in insider selling. The stock scored a 2 on Painchaud's model back in August but was sitting at 6 by the start of November. "To us, Franklin is where the risk is," Painchaud said.
Despite the internal bearishness at Franklin, some analysts remain quite optimistic about the stock.
Prudential Equity Group analyst John Hall said the company has proven to be a beneficiary of the mutual fund scandal so far. The firm attracted $1.7 billion of investor capital in October while tainted companies like Putnam and Alliance have seen big outflows, according to the Financial Research Corp. of Boston.
At the end of October, Franklin's assets under management reached $314.3 billion, up 4% from the prior month thanks to stronger inflows and better investment performance. Last month, J.P. Morgan analyst William Tanona raised his earnings estimates on the stock for 2004 and 2005.
Still, he noted that Franklin is overvalued and he doesn't believe it will outperform its peers going forward because 50% of its assets under management are nonequity or hybrid products. The company has roughly 31% of its assets in fixed income products, which have been hurt and likely will suffer further by an increase in interest rates.
Shares of Franklin have been trading sideways since mid-October, but are up almost 22% since the start of July and are now sitting close to a 52-week high. On Monday, the stock fell 13 cents, or 0.3%, to $47.70.