It's certainly been a rough ride for
. Heading into the summer, shares of the manufacturing-systems and machine-tool designer were steadily declining from their 1998 peak of around 24. But early June found the stock trading down around 15 -- having struggled back from depths below 13. Then on June 9, the company warned it would fall short of second-quarter earnings estimates because of complications associated with a new software system. This came at a time when many on the Street seemed to have concluded that the worst was over for Unova. Before you could say double bottom, the stock was back to 13, about where it was trading Tuesday.
Situations like these can make for some good insider watching. Of course, you must watch carefully. We've seen cases, for example, in which insiders who hold plenty of exercisable options in beaten-down stocks decide to buy in the open market. A sign of confidence, perhaps, but why don't they simply cash in the options to increase their holdings? Good question. You can't help but wonder whether the insiders aren't as interested in giving the
of confidence as they are in upping their own personal stakes.
At Unova, this question was settled when the stock dropped to the point at which virtually all insider options were under water. In this case, insiders have no choice but to buy in the open market. And in the absence of company-sponsored loan programs or executive ownership guidelines -- that is, mandates that insiders hold a multiple of their salaries in the company's common stock -- we gain plenty of confidence in the insiders' actions.
In May and June, four Unova insiders purchased a total of 121,500 shares in the open market at prices between 13 and 15 per share. Chairman Alton Brann, who has been buying on dips since November 1998, led the way, picking up 100,000 shares. Interestingly, he picked up shares late last year at higher prices. The latest is the largest position he has amassed at any of the five companies at which he has filed as an insider.
The buyers also included director Paul Bancroft, who picked up 10,000 shares. Having likewise been involved in numerous insider relationships, he, too, has rarely bought in the open market. Chief Financial Officer Michael Keane, a rather persistent buyer since August 1998, has routinely picked up shares on dips as the stock worked its way progressively lower. His recent buys -- totaling 10,000 shares -- represent his largest purchase to date.
We've all heard that averaging down is rarely the best investment strategy. It may come as a surprise, then, that this very often is just what we want to see from insiders. More often than not, persistent buying into weakness signals that the long-term fundamentals for the stock aren't deteriorating as much as the short-term price momentum might imply. In other words, persistent insider support can point out a classic, actionable, oversold condition.
On a related tack, we like that Unova has resisted the urge to reprice. So often these days, companies faced with underwater options simply lower the exercise price of the options to compensate for the drop in the shares. As you can imagine, most professional investors oppose this practice. Our conversations with Unova confirm the company's aversion to it.
In a sense, the situation at Unova is reminiscent of
in the early 1990s. In 1993, just as Big Blue's shares were bottoming at around a split-adjusted price of 11 to 12, key insiders, including Chairman Louis Gerstner, started buying actively in the open market. As at Unova, all employee options were under water. As at Unova, no loans or company hoopla surrounded the buys. Insiders, it appeared, were simply speaking with their wallets. The rest, of course, is history.
Bob Gabele has been tracking and analyzing insider trading since 1978, most recently for First Call/Thomson Financial. This column is not meant as investment advice; it is instead meant to provide insight into the methods of insider trading. At time of publication, Gabele held no position in any of the companies discussed in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabele appreciates your feedback at