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In many ways,

Ha-Lo Industries


has grown to be the kind of stock only a mother could love. The problems began when the marketer of promotional products failed to meet expectations in the fourth quarter of 1998, and perhaps more importantly, failed to prepare analysts for the shortfall. Unfortunately, those who remained faithful were treated to a succession of warnings, further shortfalls and charges, the cumulative effect of which ultimately drove the share price to less than 5.

Amidst this carnage, insiders at the company have been supporting the stock with a series of open-market purchases (most recently in August, when three insiders purchased 229,000 shares in the 5 to 7 range).

But what's harder to decipher from the filings -- and what doesn't show up on most public, insider-information Web sites -- is an even more striking discovery: Ha-Lo CEO John Kelly, who had signaled bearishness on the company's prospects even before the troubles, has recently turned undeniably positive on the company's shares.

It all began back in 1998, when Kelly entered into three distinct hedges (only two of which are shown on the chart below), which served to protect the value of his personal holdings from any subsequent fall in the price of the stock.

Now There's a CEO With Timing!
Ha-Lo Industries CEO plays his stock like a fiddle

The hedge he used is called a zero-cost collar arrangement: By selling covered call options (so giving up potential upside in the stock) and using the proceeds to purchase a like number of put options (in which he cuts his exposure to a potential fall), he effectively freezes the value of his holdings within a fairly narrow range. In all, the contracts effectively hedged more than 500,000 Ha-Lo shares against downside risk at no out-of-pocket cost to him -- thus the name zero-cost collar.

Why do we care about this bit of old news? Because just last month, Kelly prematurely closed out all three collars -- in two cases, well ahead of the previously established expiration date. True, because the stock spent the first quarter of 1999 in free fall from more than 25 at the New Year to below 10 by the end of March, Kelly made out like a bandit.

In each case, he received a cash payment determined by the difference between the put price (in all three cases, roughly 20) and the 6 share price on the day the contracts were terminated. The calls, which were out-of-the-money, expired worthless. Even so, by prematurely terminating the agreements originally set to expire in August 2000 and November 2001, Kelly has signaled his belief that things may be looking up for the stock.

Difficult as they are to spot, derivative transactions by corporate insiders have in the past offered some truly compelling clues. We've already

discussed cases of insiders utilizing both zero-cost collars and forward sale contracts to hedge their positions against downside risk. No insider signal is 100% predictive, but over the years, we have detected a strong correlation between the use of such hedges by corporate insiders and near-to-intermediate weakness in the corresponding stock prices.

When sniffing out collars, the news need not always be bad. Just as an insider's hedging his common position can raise red flags to investors, an insider's desire to extricate himself from such an agreement can be singularly bullish. Back in June 1998, for example, we discovered

American Stores

chairman Victor Lund prematurely closing out a zero-cost collar more than two years before expiration. What's more, he paid a cancellation fee to do so. On Aug. 4, the company announced that it would be purchased by

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at a more than 20% premium.

More recently, in July 1999, latex glove manufacturer



director Neil Braverman actually


to close out a zero-cost collar by which he had previously hedged more than 500,000 shares. Keep in mind, Braverman, a prolific user of zero-cost collar hedges dating back to June 1998, had benefited from the stock's swoon from a high of more than 45 in mid-July 1998 to less than 8 by April 1999.

Braverman prematurely closed out his collar on July 11, 1999, just months before


(KMB) - Get Kimberly-Clark Corporation Report

agreed to buy Safeskin for $752 million in stock on Nov. 11. At roughly 13 per share, this marked a $3 premium over the 10 share price on the day the collar was cancelled, thus proving a timely transaction for the director.

What's it all mean for Ha-Lo? Well, analysts have been known to hold a grudge. To make matters worse, some contend that Ha-Lo management (Kelly included) never fully explained the 1999 shortfalls, much less laid out the corporate vision going forward. In what little it has divulged, management has itself stated that the turnaround will take some time.

Still, the insider buying looks legit. And for whatever reason, the stock has been acting rather well over the last few weeks. That the company's CEO has seen fit to prematurely close out a de facto short position surely adds credence to the notion that improvement may come sooner rather than later.

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