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Finding the Hidden Motive

Even preset sales by insiders can contain valuable signals.

Updated from 12:42 p.m. EDT



(ADSK) - Get Autodesk, Inc. Report

reports earnings Thursday, you might ask the company's CEO why she is selling 50,000 shares of the company's stock each week through a prearranged trading plan.

While insider selling is a well-known investor red flag (albeit one subject to debate), Autodesk is an example of a new generation of insider transactions that investors may want to add to their stock-analysis arsenal.

Similar to insider sales, investors probably wouldn't want to base a decision on buying or selling stock on these new scenarios alone. But they can be indicators worth watching.

To avoid insider trading on material information, many executives have adopted what are called 10b5-1 plans, named after the Securities Exchange Act provision that defines insider trading.

These plans take the discretion to sell out of insiders' hands by establishing a predetermined program of sales that can be based on a schedule -- monthly, for example -- or at a specified price.

Because the sale happens independently of the seller, an investor may be apt to disregard transactions under 10b5-1 plans.

But not so fast.

Consider a couple recent examples involving

(AMZN) - Get, Inc. Report

and Autodesk.

Days after the release of its latest quarterly results and a subsequent jump in its stock price across the $40 mark and then above $45,

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Amazon saw a flurry of sales earlier this month, with eight insiders ultimately selling some $17.7 million worth of stock under their 10b5-1 plans.

Amazon spokeswoman Patty Smith says the sales were not prompted by a change in the 10b5-1 programs but instead could have been triggered by timing or stock price. She declined to provide additional detail on price triggers.

Getting the Message

Given that no insider had sold any shares since February, before the latest binge, a price trigger looks likely. And that sends a message to investors.

"It ... sends a signal that a certain value was going to be good enough to sell at," says Chris Bonavico, a portfolio manager with Delaware Investments.

Bonavico says he looks at the 10b5-1 plans relative to an insider's overall holdings and whether the plan is merely a way for management to benefit from a stock's volatility. Rather than holding options, he prefers executives own actual shares of stock.

Autodesk CEO Carol Bartz offers another example of when insider selling under a 10b5-1 program might be worth noting. Bartz has been exercising 50,000 options and then selling the shares just about every week since December under her 10b5-1 program -- a rate of about 600,000 shares a quarter.

That's a formidable acceleration from previous selling at a pace of 30,000 a week, 15,000 a week and 10,000 a week dating back to mid-2003, with some breaks in between.

As the price of the stock has climbed, Bartz's selling under the program has generally increased.

"By her escalating sales, it tells you she's become less comfortable with holding the stock," says Tony Ursillo, an analyst at Loomis, Sayles & Co. "It may also tell you she worked very hard for many years to bring this company to its current level of success and that she wants to reap some rewards for that, which nobody could fault her for."

"But certainly the fact that the frequency and magnitude of selling has increased as the stock has gone up at least signals to me that she doesn't want to hold nearly the same percentage of her net worth in the stock as she did previously," Ursillo adds.

Bonavico notes that such increased selling raises questions about whether the CEO is thinking about retiring or how she feels about the maturity or competitive structure of the business.

In an email, a representative from Autodesk said that the number of shares sold is based on a pre-established formula which hasn't been increasing but may look as if it has, because an old plan was before a stock split at the end of December and a new plan is post-split.

"Carol has a trading plan that described a formula to sell 50,000

shares per week and, once such a plan has been established, the sales are made automatically," a spokeswoman said. "She has a lot of options and all our officers have been encouraged to set up automatic plans which, among other things, reduce the overhang."

Exercising for Whose Health?

But even considering the stock split, an analysis by ThomsonFinancial showed that Bartz has increased her sales. Thomson foundthat the number of shares exercised and sold by Bartz has increasedfrom 340,000 shares in 2003, before the company's stock split, to 1.36million shares in 2004 and 3.1 million in 2005. This year, even afterthe 2-for-1 split, Bartz has exercised and sold off more than doublethe shares last year.

With some of her options expiring as early as March 2006 and thestock up more than 300% from its lows in 2003, Bartz's selling mayjust be profit-taking, Thomson research analyst Avita Sukhram noted.And to be fair, Bartz still owns a load of options -- nearly 5 millionthat were exercisable within 60 days of March 31, 2005, according tothe company's proxy statement.

Indeed, such selling can make sense, notes Chuck Jones, an analyst with Stein Roe Investment Counsel. "You pay a lot more attention to buys than sells, because I don't blame a company exec that has a whole lot of net worth in stock and sells out," Jones says.

"If I put myself in his shoes, I'd be wanting to take some money off the table, too, even though the outlook may be very good," adds the analyst.

Meanwhile, companies can get around insider-trading rules through another type of transaction -- timing option grants.

Last year,

BEA Systems


granted a total 1.85 million options to six executives on May 25, the same day the company met with analysts as part of its annual eWorld event.

That proved to be fortuitous timing because the stock enjoyed a nice bounce two days after -- gaining more than 5% above the $8.25 strike price on the options.

BEA Vice President of Investor Relations Kevin Faulkner says that the timing of the grants typically coincides with the company's board meeting and that the grants don't begin vesting for a year -- and then monthly after that.

Consequently, he suggested, the executives receiving the options can't benefit from any short-term fluctuation in the stock price.

Still, the executives are undoubtedly better off if they can get a lower strike price on their options than a higher one -- even if they can't exercise options for a year.

"It's interesting that the timing of some of these grants seems to be so beneficial," Ursillo says, suggesting that it could be a signal of good news ahead.

Indeed, that proved to be the case more recently, when software giant


(ORCL) - Get Oracle Corporation Report

granted 12 executives a total of 21.7 million options on June 20 -- nine days before the company reported earnings for its fourth quarter and fiscal yearend.

Last year the company granted executives options in August and the year before that in July.

In response to an inquiry about the earlier options grant, Oracle spokeswoman Deborah Lilienthal offers this explanation: "The grants to our executives generally occur at the same time we make our annual grant of stock options to our employees. This annual grant has generally been made in June, July or August."

But the timing of the grants in June -- ahead of Oracle's quarterly report -- led Ursillo to "feel OK" about the quarter, he says, acknowledging that it may not be a definitive indicator but more a confirmation of fundamentally based conclusions.

And guess what?

Oracle delivered stronger-than-expected fourth-quarter earnings and issued solid guidance for 2006. That sent the stock up nearly 6% the day of the earnings and nearly 10% above the $12.34 strike price. Oracle options vest 25% annually on the anniversary of the grant date.

"Let me guess -- the earnings were positive," UC Berkeley Law Professor Jesse Fried quipped when told of the Oracle example. "It is very common. There are a number of studies that show that companies that have fixed option grant dates tend to delay the release of good news until afterward so that the executives can get a lower exercise price. And they also accelerate the release of bad news to try to depress the price.

"In companies where they have flexibility over the timing of the grant, they will often move the grant date around in order to get a lower exercise price," added Fried, the author of a book on executive compensation titled

Pay Without Performance


"What they are doing is insider trading," Fried said, speaking generally. "They're getting an option with a strike price that is below what they know the actual value of the stock to be."

As Fried acknowledged, because companies may offer up various explanations for changing a grant date -- and it's very difficult to prove the reasons are different -- it's a good rationale to keep close watch on what top managers are doing, whether with stock-option grants or stock-trading plans.

"The stock is still primarily driven by fundamentals and valuation, but we're certainly always interested in what insiders think about their stock," sums up Ursillo.