Who Says Technology Insiders Never Buy?

It may be a rare occurrence, but investors should pay attention when these execs accumulate!
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There is a notion that insider-selling information has little meaning for technology investors. On the surface, that is somewhat true. The liberal use of options to compensate executives at many technology companies means that these companies regularly file insider-selling intentions. And given the sector's remarkable performance, it's difficult to fault insiders for selling stock. After all, who wouldn't want to diversify if much of one's wealth were tied up in a single stock?

The problem extends to insider buying at technology companies. With so many insiders holding stock options, why would tech insiders buy, even if they were ecstatic about their company's prospects? That's why you don't see the level of insider buying in technology stocks that you do in, say, value stocks.

Its rareness makes insider accumulation all the more interesting when it occurs. Take the recent cases of both

Intelidata Technologies

(INTD)

and

Softnet Systems

(SOFN)

, both of which have enjoyed impressive pops since company insiders acquired shares. Intelidata has been especially hot, rocketing from a low of less than 2 in November to a recent intraday high of more than 8 1/2. By comparison, Softnet's near 40% year-to-date gain is modest. The question is, does insider-buying information come too late?

Maybe not. Over the past year or so, a startling trend has developed on the insider front. In the relatively few cases where insiders have accumulated shares of technology stocks, the activity has been inordinately predictive. Following these insiders has not only led to a high percentage of winners, but to some really big winners indeed. Perhaps more importantly, in most cases the run-ups have endured well beyond any initial pop.

For example, insiders at battery-technology developer

Valence Technology

(VLNC)

purchased shares aggressively throughout the summer and into September 1999. Since those buys, most of which occurred in the 5 to 6 range, the stock has appreciated more than 300%.

The insiders at

Cadence Design Systems

(CDN)

provide a subtler, though equally compelling example. Here, insiders purchased shares throughout the summer at around 10. Since August 1999, the stock has more than doubled.

Globalstar Telecommunications

(GSTRF)

and

Concentric Networks

(CNCX)

are other examples.

This trend can be traced back at least as far as

Cypress Semiconductor

(CY) - Get Report

, where insiders exercised nonqualified stock options in March 1999 with the stock trading at less than one-third its current 35 per share.

CustomTracks

(now

ZixIt

(ZIXI) - Get Report

) and

Sanchez Computer

(SCAI)

are other examples where insider accumulation was a harbinger of good fortune. To be honest, it pays to take a hard look at accumulation in any tech-related issue, no matter how subtle.

Which brings us back to Intelidata and Softnet. At Intelidata, two insiders purchased a combined 106,000 shares in November and December at prices ranging from as low as 1 1/3 to as high as 4 per share. Director John McDonnel, who purchased 100,000 shares, was fortunate enough to catch a quick 60%-plus pop. Director Norman Tice's 6,000-share purchase is in some ways even more impressive, as it occurred after a considerable rise in the shares.

Softnet insiders have been more discreet in signaling their confidence. On the surface, the 21,443 shares recently acquired by Chairman Lawrence Brilliant (15,818 shares) and Vice Chairman Ronald Simon (5,625 shares) may not seem unusual. Dig deeper, however, and there are several reasons to like the insider picture. It is always good to see insiders exercising options and holding on to the underlying shares, and in this case, both nonqualified and incentive stock options were involved.

Furthermore, the options were nowhere near expiration. Insider sales at this particular company have been nonexistent since 1998, and executives have not used any of the stock's subsequent run-ups as an opportunity to take profits.

Just how much upside a stock can offer is a question which insiders have never addressed particularly well. It doesn't hurt, certainly, to see insiders continue to buy even as the stock appreciates, as is the case at Intelidata. And like they say, sometimes the trend is your friend. Hard as it's been to spot, keeping an eye out for tech insider accumulation has made for some happy investing -- even for those not fortunate enough to get in at the absolute bottom.

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.

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