Insider Activity at BE Aerospace -- Like a Crystal Ball (BEAV)

Investopedia Advisor submits: It is important that investors consider a variety of factors when researching a company to invest in. And one of the most important data points to be considered, I think, is insider buying and selling. Why? Because what better sign can there be about a company's future than when its officers buy or sell their firm's stock in the open market using their own personal money?

A terrific example of the importance of tracking insider buying and selling, which, I might add, can help you make a lot of money, can be found in the analysis of insider activity at a company called BE Aerospace (BEAV).

BE Aerospace is a company that makes galley equipment and a variety of other parts that go into commercial aircraft. With gas prices on the rise, and airline ridership sluggish at best, one might assume that this would have been a lackluster investment over the past few years.

But that assumption would have been wrong, and a proper analysis of insider activity would have revealed that. In fact, for the past decade insider activity in this stock has been almost like a crystal ball when it comes to future stock movements.

Consider the following:

In 1995 insiders bought their shares in the single digits, and watched it climb to $44 by late 1997. On the way up, in 1996, insiders started selling, and when the stock hit its peak, execs booked a huge profit. After that, the stock dropped to the mid single digits again by mid 2000, when they buying started again. The stock then ran to $24. Insiders sold again on the way up.

Then the stock came back down to the single digits again in 2004. And guess what? Insiders bought again, and the stock today is up at $23 a share. So what are insiders doing now?

They are selling. In fact, over the past six months insiders have sold a total of 1.9 million shares. The transactions were a mix of outright selling, and option exercising and then selling the underlying stock.

Does this mean you should short the stock?

The company has a decent balance sheet, and ample liquidity. We are also starting to see fuel prices level off, and the outlook for the major airlines appears to be improving, albeit slightly. Further, Wall Street figures the company will earn $1.19 a share in 2006, and $1.32 a share in 2007, implying a solid growth rate.

On a quantitative and a qualitative basis, I think the shares are probably fairly valued right here. But that's really not relevant. Because obviously, although the fundamentals appear intact, officers and directors of the company must know of something, even if it’s the future lack of (as opposed to detrimental) news flow, that will bring this stock lower.

Again, they have a terrific record of timing movements, so I would argue that it if history is any indicator, the stock is more likely to go down then up. But my point here isn't to recommend a position one way or the other in BE Aerospace. My point is to demonstrate the relevance of insider trading analysis, and more specifically, what investors should be looking for.

I look for the frequency of the activity. If one exec buys or sells shares, I usually don't advocate acting on that information. Because its hardly a trend, and the insider could be selling for any number of reasons. But when three or more insiders buy or sell the stock in the open market, in or around the same time, you should pay attention.

You also should look at the size of the transaction. If the officer or director sells or buys $5,000 worth of stock, but makes $1 million a year, the transaction isn't worth paying attention to. But if the transaction is worth $100,000, or 10% or more of the execs salary, you know they mean business.

Lastly, look at the insider history. Are officers buying stock when they are hired, and then selling when they leave for another job? Or, are they constantly buying and selling the stock and making money? This information is invaluable, and will help you gauge the likelihood of future stock movements.

For those wondering, insider buying and selling in the open market is perfectly legal. Officers can conduct transactions at any time, as long as it is not in proximity to a vital news announcement, earnings release, or done with knowledge of an impending deal or other factor which could affect the share price. Management must make investors aware of their transactions through the filing of a “Form 4” with the SEC.

The Form 4 contains details of the transaction including the quantity and price of the shares purchased or sold, as well as the name, and title of the officer or insider. My point is this information is public, and should be used to your advantage. So before you pull the trigger on any stock, go to the SEC website and look at the most recent insider data on the company you are looking to buy or sell. You'll be happy you did!

Lastly, below are three stocks that are being sold big time by insiders. All are big name, high-profile companies, known for their savvy execs with a knack for timing. I suggest this list would be a great place to start your research, and for you to weigh the data against the fundamental picture. I’m not saying they are outright short sell candidates at this point. But again, this is the type of data I look for as a basis for further research.

They are:

Yahoo! (YHOO): Insiders have sold more then 4 million shares over the last six months. And although the lion’s share are option-related, I think it says something that execs are choosing to get out now, rather then to exercise and hold the shares.

Juniper Networks (JNPR): Insiders have sold more then 800,000 shares over the past six months. Again, most of the activity is option-related. But to sell now, when the stock is in the lower end of its 12-month trading range? Maybe there is nothing to it, but I don’t like it.

EarthLink (ELNK): Insiders have sold more then 200,000 shares in the last six months. Again, the activity is primarily option related. But like Juniper, why are they selling near the 52-week low?

Once again, I’m not saying these stock are surefire short sell candidates at this point, but the presence of substantial insider selling should cause any serious investor to dig deeper into a company before venturing forth into a position on it.

By Glenn Curtis, Contributor - Investopedia Advisor

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

At the time of release Glenn Curtis owned no shares in any of the companies mentioned in this article