INVESTORSFRIEND INC. NEWSLETTER APRIL 24, 2004
INSIDER TRADING
Now that Canada finally has an internet based system to report and view
insider treading transactions, you might want to take a quick look before buying
any stock. Here is the link:
https://www.sedi.ca/NASApp/sedi/SVTItdController?locale=en_CA
The reports go back to June of 2003 in most cases, but I would focus on the
last 4 months or so.
A few things to keep in mind regarding insider trading:
Insider Trading is not illegal. It only becomes illegal if the insider trades
on material inside information that has not been released to the public.
For example if an insider sells shares just before the company issues major bad
news that is illegal. However, this is a bit of a farce because insiders always
have some inside information. But usually their knowledge is not considered to
be "material". I don't mind insider trading since it gives the public a signal
as to what insiders think of the share price.
Some types of trades mean more than others. Purchases "under a plan" are
regular monthly purchases that may even be paid for by the company. These don't
really tell you anything about whether management thinks the stock is a buy or
not since they are just buying a certain amount each month.
Purchases or sales "in the open market" are transactions that can
indicate if insiders think the stock is good value or not.
Transfers by gift or similar transactions do not mean much.
Sales by insiders are generally a negative signal. However if it's only one
insider selling and if they still hold a large amount of shares after the sale
then it may not mean too much. In some cases insiders have a huge amount of
their net worth tied up in the company and if their salaries are not huge it is
understandable that they might want to access some of their wealth.
Purchases in the open market by insiders is definitely a positive signal. The
only caution there is that there may be cases where management requires
executives to own a certain amount of shares so in that case it would not mean
as much.
Often you will see shares acquired through the exercise of options and this
is often quickly followed by the sale of some or all of the options. It is
possible that the options were about to expire and therefore the acquisition of
shares in this manner is not much of a signal. I find it to be a mildly negative
signal when they turn around and sell all of the acquired shares. They
generally do sell some to raise the money to pay for the acquired shares and to
pay income taxes. But when they sell all of the acquired shares, that does seem
negative. But it seems to be almost standard practice to turn around and sell
all of the shares acquired from options and so I don't view this as negatively
as I view sales of shares that were held for a longer term.
Purchases of shares by the "issuer" is the company buying its own stock. This
is generally a mildly positive signal although not always. (Delusional
management might be willing to use company funds to buy back shares even when
the share price is no bargain).
In most cases you will not see any insider trading during the period in which
a quarter or year has ended but the earnings have not yet been released. I
understand that most companies impose a "blackout" period at times like that to
avoid charges of illegal insider trading since insiders may know what the profit
and sales were before the numbers are released. Similarly if the company is in
negotiation to acquire another company or be acquired itself then there would
likely be a blackout period.
Recent Successful Stock Picks
Some of the stocks that I have done well with since the beginning of this
year are:
A sports bar restaurant chain that is up 66%. A Canadian general insurance
company that is up 19%. A Canadian life insurance company that is up 27%.
While I view the market as risky there still seems to be at least a few areas
that look like bargains. In the long run the Financial Services sector always
seems to do well. Right now I particularly like the general insurance sector due
to recent price increases and improved profitability.
I don't cover energy stocks but I do think that this area will continue to do
well.
Future Business Trends
As the baby boomers age it is interesting to think about what kind of
businesses might do well as a result of meeting their needs. Also the
"cocooning" trend seems likely to continue as people of all ages stay at home
partly because there are a lot more ways to stay entertained at home than was
the case years ago.
Nursing homes have long been touted as an example but the problem is there
may be too many competitors. The fitness craze may not benefit much more because many
boomers especially the less fit are going to start needing medical intervention
including cosmetic surgery to maintain their desired youthfulness.
Cosmetic surgery providers will likely do well due to demand and limited
competition (there is no surplus of surgeons). This will include everything from
laser skin treatment to major surgery.
In Canada, the demand for more private health services will become an
unstoppable force. Canadians with money and urgent health needs will simply fly
south if clinics are not opened here. Diagnostic services like all forms of
medical tests and medical imaging should be among the first services to become
much more widely available on a user-pay basis.
In-home entertainment of all sorts including movies on demand satellite T.V.,
mega screen T.V. and virtual reality entertainment will likely continue to grow
rapidly. Home security services will also likely continue to grow. These can be
great cash flow businesses since users tend to become long-term subscribers.
Casual dining chain restaurants should continue to do very well. (Fine dining
will continue to wither).
Gardening continues to grow in popularity. (There is a famous greenhouse near
me that is an absolute gold mine).
As investors we should keep our eyes open for companies that not only have
products that take advantage of these trends but focus particularly on products
and services where quality matters and price competition is not as strong.
Is the Market a Buy Now?
It is always very difficult to predict where the market will go in the short
term. However at this time I am more fearful of a decline than I am hopeful of
further upside. The markets had a large increase in 2003 and in Canada the
markets are up about 5% in 2004. Now we have long term interest rates starting
to turn upward. Higher interest rates are like a gravitational force pulling
stock prices down. It would take a very strong earnings season to overcome this.
I have updated my analysis of whether or not the Dow Jones Industrial Average
is over-valued at this time. Click to access the
article.
In any market it is always possible to achieve positive returns by being in
the right stocks at the right time, but it is definitely far easier when the market
in general is rising.
Hungry?
In all areas of life including business and sports it is sometimes the
hungriest team that wins rather than the most skilled or the smartest.
In selecting companies to invest in I would prefer to invest with management
that is hungry to win and make money. But I have to be careful that they are not
so greedy that they are willing to take money from investors rather than win it
by satisfying their customers.
Family or big-owner controlled companies often get a bad rap. But in reality
such companies have done very well. (Think Wal-Mart, Microsoft,
Berkshirehathaway, Dell and many others in the U.S. In Canada we have the Power
group of companies, Power Financial, Power Corp., Investors Group, Great West
Life, we have Canadian Tire, Buhler Industries and many others).
Quite often the owner/leaders of these companies are extraordinarily driven and
hungry individuals. In most cases they will do everything possible to keep their
companies growing. The founders of such companies are often much more
passionate about growing their business than they are about getting personally
wealthy. I consider it a good sign when these type of leaders make their money
through their dividends rather than through very large salaries and stock
options. When I see extreme salaries and stock option awards then I start to
suspect that the leader is more interested in getting rich than anything else
and I don't trust them.
If you can find companies ran by very hungry and driven individuals who are
also trustworthy then these companies will usually turn out to be good long term
investments.
End