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Strong Insider Buying Seen at Adept and SCP Pool

Some encouraging trends pop up in a pair of promising small-caps.
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In these days of momentum investing, one can't help but marvel at the quandary presented by so many promising smaller-cap issues. Even great earnings results are frequently greeted with greater yawns, and the stocks go nowhere. Could the key to winning the small-cap battle be the ability to identify stocks for which increased Wall Street sponsorship may be looming? Getting in ahead of the pack is part of the game. And if you really want to play, insiders can give you an advantage.

Such may be the case with the shares of

Adept Technology

(ADTK)

. The stock has been trading between 5 and 8 for nearly a year. The company's following on Wall Street has been slow to return since the shares fell from grace in early 1998. With only four firms currently maintaining earnings estimates on the company, it's little wonder the stock is having trouble picking up steam. Institutions hold just 38% of the outstanding shares, meaning there's a lot of room for improvement there as well.

While better analyst coverage may be long in coming, recent insider activity seems to suggest that something good is already on the way. In May, four insiders acquired a combined 60,000 shares, largely through the exercise of nonqualified stock options. To us, the conversion of nonqualified options carries special significance -- when the underlying shares are retained. This is because insiders suffer adverse tax consequences should the shares fall afterward.

Of the 25,000 options exercised by Chairman and CEO Brian Carlisle, for example, nearly all were nonqualified. Mr. Carlisle, we should point out,

sold

shares in early '98 before the stock plunged 50%.

Another relatively recent seller is now a buyer. Bruce Shimano, vice president of research and development, exercised a combination of incentive stock options and nonqualified options to acquire 25,000 shares. He was a seller as recently as December 1998 at around 7. Director John Pomeroy exercised nonqualified options for 5,000 shares, while director Ronald Codd bought a like amount in the open market. Most of the options exercised were not set for expiration until 2006. You've got to like the apparent change in sentiment from these company insiders.

For those unfamiliar with the company, Adept designs, makes and markets intelligent automation software and hardware products, including machine controllers for robotic assembly lines and flexible automations systems. They serve a wide range of customers in the electronics, telecom, food processing, pharmaceutical, appliance and automotive components industries. Needless to say, the company benefits when the capital spending cycle is strong.

The activity at Adept is not unlike what we saw from insiders at

Cypress Semiconductor

(CY) - Get Cypress Semiconductor Corporation Report

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just a few months back. There, too, insiders exercised nonqualified options and held the underlying shares. Not a bad move as it turns out: Cypress has risen more than 30% since our May 18

article.

On the subject of improved sponsorship, one might suspect that

SCP Pool

(POOL) - Get Pool Corporation Report

is in for some attention. SCP who? That was our reaction when we first encountered a recent splash of insider buys at the company. Since February, five insiders acquired a total of 105,200 shares, 85,200 of which were purchased directly on the open market.

The accumulation at this growing distributor of swimming pool supplies and related products has our eye for a number of reasons. For one thing, the number of shares bought is considerable, especially given the stock's rather limited float.

We also like the profile of the individuals doing the acquiring. Director Robert Sledd, for instance, picked up 70,000 shares. The activity was uncharacteristic for Sledd, who sits on two other corporate boards and has not been known to buy his companies' stock in this kind of volume.

Another big plus: Director James Gaffney, who first bought 5,000 shares at 13 5/8 per share, followed up with another 5,000-share purchase

after

the shares had rallied to 17 3/4 per share. Insider buying after price jumps is rare and can be considered exceedingly bullish.

Unlike Adept Technologies, SCP Pool shares have done well lately, with the stock having recently registered a new high of 22 15/16. Another difference is that the company is more than 91% institutionally held, leaving relatively little supply to go around. In the most important regard, however, the two cases are similar in that insider buys like those seen at both companies seldom occur when bad news is on the horizon.

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

rgabele@thestreet.com.