How To Use Insider Buying

To Pick Up Stock's At Bargain Prices

Technical analysis - the study of price and volume patterns - can be extremely helpful in improving ones investment returns.

Complimenting its usefulness in a powerful way is an astute understanding of "insider trading" and when it is taking place and for what reason.

"Insider trading" of course is not something crooked. It is the term used to describe trading done by a company's executives, directors or large shareholders. It is perfectly legitimate.

The buying and selling "insiders" do in their own stock must be reported to the Securities and Exchange Commission. The information is then distributed on a weekly basis to the public via newspapers and financial services.

Generally speaking insider buying is bullish. It says that the company insiders believe the outlook for their company is good. They should know because they follow their firm's business closely and get a lot of internal reports.

However, it's illegal for insiders to "profit from imminent insider information." For instance, they, nor their friends, can not buy a stock or option prior to a merger or go short in advance of bad news.

Insider selling in general is bearish. However, it is tricky to use because insiders sometimes insiders sell not because of anything to do with the company, but for personal reasons. If the insider selling occurs after a stock has had a big move without any insider buying that is a bearish signal.

Charles Ganz, a 37-year old money manager who runs about $450 million out of North Miami Beach, Fla. watches insider trading closely.

Ganz has a good reputation and track record. What is interesting is that even though he and his staff do a massive amount of research work he places a great deal of importance on "insider trading."

He made an intriguing comment that he likes to buy good stocks on pullbacks. However, as investors know discerning a pull back from the start of a major decline can be difficult.

One trick Ganz uses is to look for a stock showing "insider buying" when it is pulling back after an advance. His thinking is if insiders are buying then that's a confirmation the company's outlook and probably the stock's price will have more to go.

An example of his technique of using "insider buying" could be seen if one studied the stock of Arrow Electronics Inc. (ARW). Investors can use charts produced by Daily Graphs of Los Angeles to look for insider trading. It is an excellent charting service.

Several years ago Arrow Electronics was trading between 40 and 33 3/4 for several months. However, in late November and December insider buying occurred when the stock dipped from 36 to 33 3/4. Importantly there was no insider selling.

Arrow's stock afterwards shot straight ahead climbing about 10 points, or 29%, in just three months. And believe it or not an insider nibbled on the stock when it hit 42. Also, - and this is very important - the company reported a hefty 57% increase in fourth quarter earnings. No doubt, the insiders were well aware of the excellent quarter coming up.

Investors would do well to study charts of good stocks looking for insider buying on pull backs or during basing phases. Listing these stocks and watching them carefully for a

breakout or the start of a move could get one into a trade with a high winning percentage.

Obviously during general stock market corrections there will be more stocks to chose from, while after a major advance there will be less. Also, one should try to find stocks showing all insider buying and no insider selling. That's telling you there is a unanimous consensus from insiders of a bullish opinion.

Of course, one should never forget when buying a stock nothing is a lock - not even insider buying. So, always have a stop price set to exit the position if the price should decline.

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Copyright Ticker Tape Digest August 23, 1996