There They Go Again at Boston Scientific

Few company insiders can match the timing of this company's top executives for insider buying and selling.
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After yet another impressive run in the shares of Boston Scientific (BSX) - Get Report, the insiders are selling. Led by company founder and Chairman John Abele, six prominent insiders have filed their intention to sell a combined 1.5 million shares.

Why even bother with insider sales, you might ask? Corporate insiders, or so the argument goes, have but one reason to buy -- they expect their company's stock to rise. The reasons to sell, however, are endless: Insiders sell not only to diversify their portfolios, but also to satisfy personal wants and needs. As a result, many insider-trading analysts have been thrown off the scent by this important, but often misleading, measure. But there are ways to cut through the noise, and it's well worth the effort.

At Boston Scientific, the number of shares sold by insiders is rarely overwhelming -- but the insiders have, on the whole, demonstrated a striking sense of timing. Time and again, they have shown a knack for acquiring shares near the bottom, and disposing near the top. And because Boston Scientific can be a volatile stock, these price movements have not been minor.

Consider their sales at the August 1997 peak, at more than 35 per share. These came just ahead of a drop in the stock of more than 40%. Later that year, when several of these same insiders bought shares, the activity preceded a roughly 70% climb in the stock -- all the way back to 35. Amazingly, one insider purchased shares both in May and October 1997, nearly catching the bottom in each case.

The Ups and Downs at Boston Scientific
Company insiders have shown a knack for buying near the bottom and selling near the top.

But by the spring of 1998, insiders were selling once again. The stock plummeted, in this case more than 40% by October. Just one month later, insiders were back at the plate, exercising options and acquiring shares on the open market. Chairman Abele exercised options to acquire 320,000 shares, holding on to all the shares thus acquired.

Until now, that is.

For Abele, who remains a major holder, the recent sale of 750,000 shares is his largest to date. Among the remaining sellers: CFO Lawrence Best, director Joseph Ciffolillo and Chief Development Officer Arthur Rosenthal.

What's the company's take? According to Best, individual motives for the sales vary. Due to Boston Scientific's aggressive acquisition strategy, the company maintains strict windows which limit when insiders can buy or sell company stock. Beyond that, Best assures, there is no investment relevance to the timing of the sales. Speaking on behalf of company management, he expresses extreme optimism regarding the company's prospects.

To be sure, Boston Scientific is an industry leader in a number of cardiovascular markets. And the recent flurry of acquisitions has enabled the company to accumulate some key intellectual property. Meanwhile, the introduction and approval of new products continues to generate excitement. Just last week, the FDA approved the Nir Primo Monorail stent system for the treatment of coronary artery disease. Next month's product launch should propel Boston Scientific into a new, highly profitable segment of the U.S. stent market.

Still, the stock has disappointed before. More than once, the blame has fallen on the very acquisition strategy so often cited in the company's favor. Others point to the fact that future FDA approvals are hardly a sure thing. Also of concern is the pending review by the

Securities and Exchange Commission

of purchased R&D -- which could hurt the earnings of actively acquiring companies like Boston Scientific. Add to this the potential overhang from a planned secondary stock offering around mid-year, and the outlook for Boston Scientific becomes far less clear.

Such clarity is a difficult goal. Interpreting insider sales is a study in human behavior, which is why we would never judge an insider profile without historical context.

Neglecting context is a surprisingly common mistake, even among those considered pros at analyzing insider sales. Modest selling at a gas utility, for example, may be cause for alarm, whereas a 5 million-share sale by

Michael Dell

may be business as usual. We looked at

Compaq

(CPQ)

a while back -- before the recent selloff -- a company at which insider sales are relatively common. What caught our eye in that case was the extent to which a number of sellers were noticeably trimming their actionable positions (common stock plus exercisable options), and that, for us, raised a red flag.

After the convincing run in Boston Scientific's shares, one might expect insiders to take profits. Given the magnitude of the sales, however (to say nothing of the insiders' past timing), the activity begs the question: Might Boston Scientific be headed for yet another swoon?

Nobody knows, of course, but what we can say is this: When trading for their own positions, Boston Scientific insiders have proven exceedingly astute. This is ominous indeed. After nearly a half-year's silence, Boston Scientific insiders are once more taking their chips off the table.

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

commentarymail@thestreet.com.