Tip

We want to talk a little about legal insider trading for a minute,
because we have seen interesting

things happening lately that should be discussed.

When someone mentions insiders making buys or sells, all kinds of flags
go up. But it is perfectly

legal and ethical for insiders at corporations to sell some of their
holdings and buy more when they

think the time is right. The real point is "what is the motive?" That
is what you (we) all need to

try and perceive.

Let's say you are offered a senior management position and in your
contract you get 50K shares of

company stock after 2 years of service. Nothing out of whack there.
Then let's say you are there for

5 years and decide that you want to buy that house up in the mountains.
Is there anything wrong with

selling 30K shares? Nope, not at all, it was after all part of your pay
package.

On the other hand, let's say we see 3 insiders sell most of their
holdings in their own company,

just a month before earnings season. Does that raise a flag? Yup. When
insiders are selling enmasse,

it often spells trouble. Think about it. Except for a few well placed
sales now and then, there

isn't a lot of reason for insiders to be selling unless they don't see
any good reason to hold it!

On the other side of the coin, we know of only two reasons that an
insider buys his own company's

stock. One is that the company puts him up to it. Yes folks, don't be
shocked, companies have been

known to pressure executives to buy company stock just to give the
illusion that the stock is so

attractive the insiders are buying it. But, it's generally only a few
shares (10K or less) and a few

people.

The other reason an insider will buy is that he genuinely believes the
stock will appreciate in

value. Well, no one has a better view of the company than the people
running it right? If insiders

are seeing good sales trends and can relate those trends to rising
earnings, it makes perfect sense

to buy some stock! Now, don't confuse this with stock "buy backs" that
we are seeing now and then. A

company buy back is a much different animal. It's still a "positive"
but not nearly as telling as

insiders deciding to buy 100K shares of their own stock.

How can you use this info? Scan the filings folks. If you see two or
more insiders buying 40K or

more shares of their own stock, we can almost bet you that in the next
few months that stock is

going to be higher. We saw it happen sometime back with NXTL. We told
you that almost 100K shares

were purchased by an insider, and "boom" they beat the estimates huge,
spiking the stock by 60%.

This guy "knew" and it's perfectly legal.

So, when you see insiders buying more than "token" amounts of stock you
need to watch that stock.

Likewise if you see insiders selling like they are all in a panic to
get out, you need to avoid it

or maybe even short it. No one knows their own business better than an
insider and if they are

bailing, you should too. You can also check for insider selling and
buying at Yahoo.com, just punch

in the stock symbol and then scroll down and look for "insider".