Monday, July 24, 2006
If you want to make a stock market killing by following insider trading, you need to know two key pieces of information:
1. The short swing profit rule
2. SEC form DEF 14A
The first of these states that corporate insiders cannot sell the shares they purchase for a minimum of six months. Consequently, insider purchases typically precede share price moves by six months or so...
The second of these is called a “definitive proxy statement.” It’s the government form that details how much high-level corporate insiders make in salary and stock compensation.
Using this information, you can gauge the significance of a particular insider’s purchases. If he’s buying far in excess of his stock grants and salary, you could very well have yourself an upcoming price spike.
For case study of how this works, let’s have a look at the home improvement giant, Lowe’s (LOW).
According to SEC filings, two of the company’s directors, Marshall Larsen and O. Temple Sloan Jr., recently bought Lowe’s stock. Between March and June, Sloan bought 31,100 shares amounting to $1.9 million, while Larsen made a single purchase of 500 shares worth $31,000 at the beginning of June.
According to the company’s DEF 14A, in 2005 both Larsen and Sloan were paid $75,000 in salary each year. They both also received 1,500 shares of Lowe’s valued at $85,000. Lowe’s also states that for 2006, the board has authorized an increase in stock grants to $115,000 worth of stock.
Based on this information, only Sloan’s purchases of 31,100 shares ($1.9 million) are extremely significant since they represent more than 25 times his annual salary and 20 times his annual stock compensation as a director.
On top of this, they increase his holdings in Lowe’s from 65,500 shares to 92,500 shares (a 41% increase).
Looking for a stock that will rally within the next six months? I’d put Lowe’s at the top of the list.
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