it down.• If the economy side gets too low, the Fed lowers rates tobring the economy up.
Stock Market andInterest Rates
Take the teeter-totter example, only this time use “stock market”instead of “economy.”• The stock market goes up if rates go down.• The stock market goes down when rates go up.• The economy (ultimately) makes rates go up.• The stock market anticipates the direction of rates beforethey actually move!Bond pricesBonds are debt instruments. Their prices fluctuate like stocks, toindicate thea certain extent.direction (up or• The bond market as referred to by stock traders is the price ofdown) most interestthe 30-year U.S. Treasury bond.rate professionals• This bond has the greatest price swings because it has thethink rates arelongest maturity of any bond traded.headed.• This indicator will tell you, at a glance, how traders whorely on forecasting interest rates interpret economic reports.
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• The Chicago Mercantile Exchange has a site to track dailydevelopments in bond prices. Bookmark it(www.barchart.com/cme/cmeft.htm).What moves thebond market andinterest rates andthen affects thestock market?
Economic reports released by various government agencies.• Some are monthly and others quarterly.• Each one provides a piece to the puzzle which the Fedstudies to determine if the economy is expanding orcontracting.• If interest rates are already low, and an economic reportindicates a robust economy, this is bad news for the stockmarket. It means the Fed will be inclined to raise interestrates. This would send the bond market down (yields wouldrise in anticipation of higher interest rates).• If interest rates are high (relatively speaking), and economicreports indicate a slowing economy, this is good news for thestock market, because rates will probably be lowered toavoid a recession. This would send the bond market up(yields would drop) in anticipation of the Fed lowering rates.For bond market basics, and an overall good place to studybonds, head to BondsOnline (www.bondsonline.com).For easy-to-understand charts and insights for the bond market(and all markets) head to BarCharts.com (www.barchart.com).
Fitting All ThisTogether
Some economic data is worth studying because:• It moves the market.• Policy makers (the people who set interest rates) study itclosely.• Some reports are very accurate in forecasting economic trends.• Which ones to follow and why?• Economic data needs to be watched for indications to assessthe state of the economy. Is it expanding or contracting? Areinterest rates likely to rise of fall within the foreseeable future?
ConstructionSpending Report
What it is: The value of all construction, public and private.Reported after it’s completed.Issued: Monthly.By: Census Bureau.Importance: Low.
Consumer PriceIndex (CPI)
What it is: Indexed off of 1982–1984 time period; a basket ofgoods used to measure inflation.Issued: Monthly, around the 15th, 8:30 A.M.By: Labor Department.Importance: High. Considered a timely indicator. Has the abilityto move markets because it’s one of the first and most reliablesigns of inflation.
Employment CostIndex (ECI)
What it is: An index based on 1989 prices (= 100) that measuresthe change in wages and salaries as well as employer costs foremployee benefits.
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BROAD MARKET ANALYSISIssued: Quarterly, last business day of January, April, July, andOctober at 8:30 A.M. for prior quarter.By: Labor Department.Importance: High. Usually moves market, accurate leadingindicator of inflation.
Employment Report What it is: Measures net new jobs created and unemploymentrate, average hourly earnings, and average workweek length.Issued: Monthly, first Friday of each month at 8:30 A.M.By: Labor Department.Importance: High. Usually moves markets due to timeliness;considered the best measure of economy’s health.Factory Orders—What it is: Preliminary report on manufacturers’ shipments,Durable Goods and inventories, and orders.Nondurable Goods Issued: Monthly, first week of month at 8:30 A.M.By: Census Bureau.Importance: Low.Gross DomesticProduct (GDP)
What it is: A measure of the economy’s total output, goods andservices, and structures.Issued: Quarterly, last business day of January, April, July, andOctober. Covers prior quarter.By: Commerce Department.Importance: High. This is an actual measurement of the pace atwhich economy is expanding or contracting. Includes an indexcalled the Price Index that measures everything consumers buy,including imports.
Housing Starts andSales of New andExisting Homes
What it is: A measure of housing starts and building permits.Issued: Monthly, around the 18th at 8:30 A.M. for prior month.By: Census Bureau.Importance: Varies. It’s a good leading indicator of home sales.Housing starts are used to forecast residential portion of GDP. Itmoves markets on occasion.
IndustrialProduction Index
What it is: Measures the change in total production of country’sfactories, mines, and utilities. Also indicates the percent of totalcapacity (capacity utilization).Issued: Monthly, around the 15th at 9:15 A.M. for prior month.By: The Federal Reserve.Importance: High. Usually moves the market due totimeliness—accurate gauge of inflation.
NationalAssociation ofPurchasingManagement Index(NAPM)
What it is: A national manufacturing index based on a survey ofpurchasing managers. Indicates expansion when the reading is+50; contraction when it’s below 50.Issued: Monthly, first business day of month at 10:00 A.M.By: National Association of Purchasing Management.Importance: High. Count on it to move markets due totimeliness, accuracy of depicting factory sector.
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Personal Incomeand ConsumptionExpenditures
What it is: Measures personal income and spending.Issued: Monthly, first business day of month at 8:30 A.M. Datacovers two months prior.By: Commerce Department.Importance: So-so. Data already a part of previously releasedreports (e.g., retail sales report). Includes data on personalsavings rate as well.
Producer PriceIndex (PPI)
What it is: Index using 1982 as a base, measures the change inprices received by domestic producers of commodities.Issued: Monthly, around the 13th at 8:30 A.M., covers prior month.By: Labor Department.Importance: High. The core PPI will be mentioned as well, asit excludes food and energy prices, which are more volatile. Ifit’s an inflation indicator, it will probably influence the market.
Philadelphia FedIndex
What it is: Regional manufacturing index covering part of theNortheast that’s a measurement of factory expansion andcontraction.Issued: Monthly, around the 18th a 10:00 A.M.By: Federal Reserve Bank of Philadelphia.Importance: Some. Occasionally has an impact on market dueto the insight it provides for the National Association ofPurchasing Managers Index.
Retail Sales
What it is: Sales at retail stores.Issued: Monthly, around the 12th at 8:30 A.M. Data covers priormonth.By: Census Bureau.Importance: High. Nearly always moves markets because it’stimely (two weeks after the end of the reporting period). Revealsa strong insight into GDP and offers a preview of personalconsumption expenditures, which reports around the first of thenext month.
Indexes
An index, as it relates to the market, is a grouping of stocksdesigned to reflect the price changes in the group itrepresents.• Some indexes are broad-based, showing a wide variety ofstocks from different sectors in an attempt to show what thebroad market is doing, or the U.S. economy in general.–Dow Industrials ($DJIA)–S&P 500 (SPX) or S&P 100 ($OEX)–Russell 2000 ($RTX)• Some indexes are sector-specific, reflecting the market actionof a single industry group. These are very narrow in scope,and can be used by the investor to determine the strength ofa specific part of the economy.–AMEX Oil Index ($XOI)–Morgan Stanley High Tech 35 ($MSH)
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BROAD MARKET ANALYSIS–Philadelphia Semiconductor Index ($SOX)–Dow Jones Utilities ($UTIL)For a comprehensive list, SmartMoney.com has a good one—easy to read and understand (www.smartmoney.com/si/sectors/).
Sector selection iscritical to success.
Studies indicate that being in the right sector (the one that’smoving up the strongest) will return more than just being in themarket at correct times by a 4:1 margin!• Finding the right sector.• Pay attention to economic reports; what are they saying?–Inflation fears on the rise or fall?–Interest rate direction?–Factory orders increasing?• Study the financial papers and periodicals.• Barron’s is a good place for sector overviews.• Investor’s Business Daily.• Wall Street Journal.• Business Week, Forbes, Fortune.• Investment newsletters.
HOLDRS andiShares
Focused investment vehicles that make it very easy toparticipate in a sector.What they are:• A basket of stocks.• Industry (sector) specific.• Trade like a single stock (can buy and sell them just like astock).• Contained in a depositary receipt or unit trust.The AMEX trades them. For a current list, go to:www.amex.com/structuredeq/sp_holdrs.stm.Review a list of iShares available and download a prospectus atthe Nasdaq-AMEX market site: www.nasdaq-amex.com/asp/prospectus.asp.
So, how do I knowwhen to buy?
Basic studies that can indicate good buying (and selling)opportunities.Relative strength—How is the stock/sector performing ascompared to another, broader index (like the S&P 500)?• Go to chart service (www.optionetics.com) and click onMarkets.• Enter ticker symbol of stock in blank quote box andhit Go.• Click scroll-down menu Detailed Quote/News, select Chartoption. Click Get Info.• Under Indicator heading, check Relative Strength choice.• Under Display, go to scroll-down menu next to ComparisonIndex, then select S&P 500.• A chart will be drawn depicting how the stock of your choicehas performed against the S&P 500 (in this example).
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• Go to Bar Charts.com for an extensive explanation oftechnical indicators when you get a quote(www.barchart.com).• Wall Street City also has a wonderfully simple method forfinding and ranking the sectors (www.wallstreetcity.com).Other Methods forIdentifying Sectors
Insider buying is the greatest vote of confidence any investorcould hope to see in a company and the more the better.• Look for companies that have large amounts of insiderbuying. LabPuppy.com has good links to this information(www.labpuppy.com/insider.htm).• Watch for unusual volume trends—Investor’s Business Dailyonce again (www.investors.com).
Just how “hot” isIndicators provide a deeper look at what the market is reallythe market, anyway? doing. Just knowing what the Dow, Nasdaq, or S&P 500 did onUse indicators toany given day doesn’t provide the investor with marketdetermine overallinternals.market strength,• Indicators provide new ways to determine marketdirection, andstrength/weakness.momentum.• Indicators track: market activity, investor activity, economicdata.• Indicators used to confirm trends or signal possible changes.Two types of indicators:• Oscillators—Help determine whether the market has reachedan extreme condition—overbought or oversold. Examples:momentum, relative strength, and stochastics.• Lagging indicators—Help to determine changes in the trend,but only after the fact. Examples: moving averages,envelopes, bollinger bands.Market Breadth—The Advance/Decline Line
The advance/decline line (A/D line):• Gauges the overall market.• If it’s moving higher, the majority of stocks are moving up.• If it’s declining, the majority of stocks are declining.• Watch for a divergence between the movement of the majorindexes and the A/D line. If the Dow and S&P 500 aremoving higher and the A/D line is moving lower there issaid to be an erosion of support, and a correction isexpected.• Daily updates on the A/D and other indicators can be foundat www.wallstreetcourier.com or each day in Investor’sBusiness Daily.
Market Breadth—Volume
Volume is said to confirm any solid move, up or down. Themeasure of volume indicates the strength, or demand behind astock.• Large volume with no price movement indicates stock isbeing accumulated.• Volume precedes price.
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BROAD MARKET ANALYSIS• Look for “biggest volume % changes” in the newspaper oronline.• Volume should move higher with a stock to confirmadvance. If volume declines while stock is going up, it’scalled a divergence. Rally is suspect, won’t usually last.• If stock goes down on increasing volume, it is said to bedistributed. If you’re in it, get out.• If volume dries up on down days, this indicates investors thatare not willing to sell.
TRIN: The ArmsIndex
By calculating advancing volume versus declining volume,investors can use the A/D line and volume together.• The TRIN shows an inverse or opposite reading than whatyou’d think: If it’s going up, the market is heading lower; if theTRIN is dropping, the market is strengthening to the upside.• Above 1—market (on balance) is declining.• Below 1—market (on balance) is climbing.• Extreme readings are the most useful for buying or selling.–A reading of 1.5 indicates an unsustainable level ofselling. Contrarian move would be to buy.–A low reading of 0.35 would indicate “irrationalexuberance.” Perhaps it’s time to take some profits?• The number isn’t as important as the direction.
Moving Averages— Moving averages are used to help identify the different kinds ofEasy to See, Easy to trends (short-term, intermediate, medium, etc.).Understand• Length can vary. Shorter moving averages are more volatile.Long ones are slow to signal a reversal in the trend.• Use several together to spot trends (10-day, 50-day, 200-day).New Highs/NewLows
By measuring new highs and new lows, you can gauge overalloptimism or fear.• More new highs mean optimism is growing. Trend likely tocontinue up.• More lows indicates downtrend is beginning or continuing.
Web Sites for theMarket
••••••
Barchart.com (www.barchart.com/cme/cmeft.htm)BondsOnline (www.bondsonline.com)SmartMoney.com (www.smartmoney.com/si/sectors)Barron’s Online (www.barrons.com)Investor’s Business Daily (www.investors.com)Wall Street Journal Online(interactive.wsj.com/ushome.html)• Nasdaq-AMEX market site (www.nasdaq.com andwww.amex.com/default.asp)HOLDRSGood explanations by:• TheStreet.com (www.thestreet.com/funds/deardagen/968391.html)• AMEX (www.amex.com/structuredeq/sp_holdrs.stm)
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• Merrill Lynch (www.ml.com/welcome)iShares• Index Shares(www.amex.com/indexshares/index_shares_over.stm)• iShares.com (www.ishares.com/home.html)• Nasdaq Quote Summary (options.nasdaq-amex.com/asp/option_index_trackers.asp): Packed with information—anall-around great site.Market Sectors• LabPuppy.com (www.labpuppy.com)• Stock Smart (www.stocksmart.com): Pay site, seven-day freetrial• Smart Money.com/Market Map(www.smartmoney.com/marketmap)• The Telecom Analyst(www.thetelecommanalyst.com/default.asp)• Optionetics.com (www.optionetics.com/default.asp)• Investor’s Business Daily (www.investors.com)Useful InternetSites for theEconomy
• Economagic (www.economagic.com): The best for economiccharts.• Federal Reserve (www.federalreserve.gov/fomc)• TheStreet.com Economic Indicators(www.thestreet.com/markets/databank/693853.html)• Financial Trend Forecaster(www.fintrend.com/ftf/default.htm)• Economic Cycle Research Institute(www.businesscycle.com/index.html)• Economic Indicators.com (www.economic-indicators.com)• The Dismal Scientist (www.dismal.com/home.htm): Greatsite!• Bureau of Labor and Statistics (stats.bls.gov/blshome.htm)• Financial Forecast Center (www.neatideas.com/index.htm)
Other UsefulFinancial Sites
• Bloomberg.com (www.bloomberg.com/welcome.html)• Equity Analytics (www.e-analytics.com): Holy Moly!• First Union Economic Indicators(www.firstunion.com/library/econews)• Investor Links (www.msdw.com)• Zacks Investment Research (my.zacks.com/index.php3)• Tradition-Axone Financial Database (tradition.axone.ch):Multilingual glossary.
7Exploring Fundamental Analysis
In the previous chapter, we learned how to examine the market by studying broadmarket indicators such as sectors. Now it’s time to turn our attention to analyzingthe individual stock. Exactly what are investors looking for in a stock? Basically,there are times when investing in the market or a specific industry group is moreprofitable than at others. In order to better understand the day-to-day fluctuations inthe stock market and increase the odds of success, the reader has learned how to interpret economic data, study volume and breadth, as well as view the market interms of different sectors. But that is only half the battle. Successful investing requires not only an understanding of the market, but also the ability to dig deeplyinto each individual company and determine whether it is a viable investment.Therefore, just as there are a number of factors to consider when studying themarket, there are an equal number to think about when analyzing a specific company. Is it profitable? Does the company have a competitive advantage? Is the management team strong? How efficient is the enterprise?These types of questions are at the crux of fundamental analysis and the subjectof the next two chapters. This chapter defines fundamental analysis and begins itsinvestigation, while the next focuses on company reports and financial statements.A common misunderstanding in the investment community is the difference between technical analysis and fundamental analysis. The easiest way I can explain it is:Fundamental analysis is the study of the company, and technical analysis is the studyof the stock price. The distinction will be made clearer as the chapter progresses.Fundamentals: Earnings, dividends, sales, revenues, profit margins, and so on.Technicals: Charts with graphical representations of price, last trade, change,volume, 52-week highs and lows, and so on.
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WHAT ARE THE FUNDAMENTALS?
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Also, in this chapter the reader will become familiar with what I consider to bethe 15 most important tools of fundamental analysis. The first five are covered inthis chapter. In order to prepare for the remaining 10, however, it is necessary to investigate financial statements. The last part of this chapter will show the reader howto go about accessing these statements.
WHAT ARE THE FUNDAMENTALS?Fundamentals indicate the financial health of a company. Most people are familiarwith what I’ll call the fundamental snapshot that provides an initial view of a company in terms of stock price, volume, 52-week range, and so on. Snapshots are easily found on a multitude of websites including Optionetics.com. If you punch in astock symbol (for instance, the stock symbol for EMC Corporation is EMC as inFigure 7.1), and click Go, the image in Figure 7.2 appears.The data in Figure 7.2 represents a snapshot of the current market valuation, therange the stock has traded for the past 52 weeks as well as various other importantvalues. Although it’s important not to attach too much importance to any one ofthese details, looked at together they provide an initial picture of the stock. Last,Open, High, Low, Change, % Change, Bid, and Ask all describe the stock’s currentprice action. The 52-week High and Low provide a historical account of the stock’sprice performance. Accordingly, with EMC currently trading at 95.75, EMC is only41/4 points from its 52-week high of 100. These are all relevant pieces of information, but not essential ingredients for fundamental analysis.
Figure 7.1 Optionetics.com Get Quote and Fundamentals (Courtesy ofOptionetics.com)
Emc Corporation (EMC)
LastOpenHighBid52-Week HighEarnings Per ShareShares OutstandingP/E RatioFigure 7.2
95.75095.93896.938N/A100.0000.572.18B166.12
Delayed Quote as of SEP 14, 20002:23:06 PM (E.T.)Change1.063% Change1.12%Low92.125AskN/A52-Week Low30.000Volume3.31MMarket Cap208.77BExchangeNYSE
Get Quote and Fundamentals of EMC (Courtesy of Optionetics.com)
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EXPLORING FUNDAMENTAL ANALYSIS
The purpose of fundamental analysis is to assess the financial history and current conditions of a company’s income, expenditure of money, and measure howefficiently they manage their business. I usually start by looking at one of the mostcommonly used measurements of a company: market capitalization. Market capitalization refers to the overall valuation the market gives to a company. Just to review, market capitalization is equal to the number of shares outstanding times theshare price. It tells the company’s size and enables a trader to place a stock in thecorrect size category: large-cap, mid-cap, small-cap, or micro-cap. Knowing acompany’s size is useful in that it helps traders to compare that company to thoseof similar size.More important, however, are two other pieces of data. For the fundamental analyst, EPS or the earnings per share describes how profitable a company is, while theP/E ratio or price-to-earnings ratio is a measure of the market price of the stock relative to those earnings. Both are commonly used fundamental analysis tools that Iwill describe in detail in Chapter 8.EPS: The primary tool that analysts look at to determine a company’s profitability: the net income or earnings of the company divided by the number of sharesoutstanding.P/E ratio: This ratio is most helpful when compared to industry averages and theoverall market. Some will use this ratio as a means to gauge whether a securityis overvalued or undervalued. Companies with high P/Es are considered overvalued, and companies with low P/Es are considered undervalued. The price-toearnings ratio equals the last price divided by the earnings per share. In thiscase, 95.75 / 0.57 = 166.12.
The objective of this chapter is to introduce the reader to the basic concepts offundamental analysis and how this discipline is used as a tool for making superiorinvestment decisions. Stocks represent a unit of ownership in a company. In otherwords, if you buy a stock, you become a fractional owner in the company. Fundamental analysis is a way of studying not the stock, but the company.The fact is, successful companies have certain defining attributes. A successfulcompany, for instance, will make profits and through the years, the profits will increase. At the same time, a successful company will see its stock price increase invalue. As an investor, this is important. The goal is to buy stock in a company andsee the stock price increase in value. Through the years, the stocks of successfulcompanies will increase in value. But how do you determine if a company is successful? Fundamental analysis seeks to answer that question.As a result, fundamental analysis can help you make better investment decisionsin two ways. First, studying each company’s fundamentals makes it becomes possible to see whether the company has desirable attributes. For instance, are the company’s revenues increasing from one year to the next, is the company profitable, andis it generating a positive cash flow? The second goal of fundamental analysis is to
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determine, given the company’s fundamentals, if the stock is a good buy—a value.In other words, if a company has all of the attributes of success (in terms of sales,revenues, profits, etc.) is the current market price for the stock a reasonable one? Aswe will see, sometimes a company can have exceptional fundamentals but the stockprice is too high to buy. In short, it is better to buy a stock when the company’s fundamentals are strong and the stock price seems low, or seems to offer a good value.As we progress through the next two chapters, you will learn how to assess whethera stock price is attractive given a company’s fundamentals.
THE FIRST FIVE CRITICAL TOOLS OF FUNDAMENTAL ANALYSISSo what are the attributes that we look for when examining a company from afundamental perspective? Let’s take a look.
1. The BasicsFundamental analysis starts at the rudimentary level. First, what line of business isthe company in? Is it an insurance company, a restaurant chain, a maker of personalcomputers? The type of business is extremely important to the fundamental analyst.For instance, consider Home Depot (HD), the number one retailer of home buildingsupplies. When would you expect the company’s sales to grow the most—duringperiods when the economy is strong and home building is robust, or in periods ofrecession? Obviously, when the economy is strong and Americans are doing well,they tend to spend more money on home building and improvements. This can significantly increase the net sales of home improvement companies such as HomeDepot. On the other hand, a less than robust economy can be a boost for homeimprovement companies as well. People’s housing needs change over time. If theydo not have the financial resources or their resources are uncertain, rather than purchase a new home or hire a contractor homeowners frequently turn to homeimprovement companies for solutions. This demonstrates an important point to remember: When it comes to consumer spending, answers are rarely black or white.Another goal behind fundamental analysis is to measure the performance of acompany. In order to do so, it is important to understand the company and how itearns money. Therefore, the more your investments in stocks reflect your personalareas of knowledge, the greater your odds of success. For example, a farmer willprobably have a better understanding of the supply and demand for John Deereproducts than he or she will for Internet software. An airline pilot will be able to interpret the impact of higher fuel costs on airline corporate profits. A homemakermight see the potential future profits behind the launch of a new laundry detergentthat has the neighborhood buzzing. In short, each individual has a specific area ofexpertise. Since one of the goals behind fundamental analysis is to study the company, the simpler and more understandable the company, the better.
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EXPLORING FUNDAMENTAL ANALYSISAs famed investor Warren Buffett once said, “Invest withinyour circle of competence. It’s not how big the circle isthat counts, it’s how well you define the parameters.”
2. Identifying Industry LeadersSuccessful companies are often industry leaders. This doesn’t necessarily mean thatthey are the largest in size; but rather that within a certain sector, the company isrecognized as a major player. It has captured a significant percentage of the sector’ssales and revenues, plus the sector itself is experiencing a healthy rate of growth.Thus, the total revenues of an industry can be seen as a pie: the larger a company’sslice or market share, the better (see Figure 7.3).Market share: The percentage of an industry’s goods and services controlled byone firm. The larger the market share, the less likely the company’s profits willbe squeezed by competition.
As new technologies emerge, some companies will set the standard for their particular industry in years to come. If you own a computer, what operating system doyou use? Chances are it is a Microsoft product. Are there any new products on themarket that are likely to change the way we live? Are your friends and neighbors allbuying the same thing—a new and innovative product? If so, who makes it? Arethere many competitors likely to step in and take away market share?Another fundamental question when studying a company is: How does it rank inits particular sector? You want to be in the company with the strongest track record.There are a few services that can help you see how stocks rank within particular industries. One place to look is Zacks Investment Research (my.zacks.com/index.php3)
Market Share Is a Company’sPiece of the Pie
Figure 7.3
30%
20%
15%
35%
Market Share Pie Chart
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by checking its “rank within industry.” The rankings are designed to isolate companies with the strongest earnings prospects. Value Line Investment Survey (with printand electronic products available on a subscription basis, as well as available in mostlocal libraries) offers a ranking system that is useful in sorting out the strongest stockswithin industry groups. Standard & Poor’s also has a ranking system, and its five-starrating system can be found in its weekly publication, the Outlook, and in its Stock Reports. Investor’s Business Daily is also a great place to turn. Five days a week it ranksindustry groups (sectors) according to strength (www.investors.com). Finally, StockWorm.com (www.stockworm.com) has an interesting site for evaluating industrygroups and important stocks within each sector.From a fundamental analyst’s perspective, a company’s position within an industry is a significant factor to consider before making an investment decision. A sizable market share in a growing industry is highly desirable because it suggests thatcompetition is not likely to eat into the company’s profits.There are a number of web sites that offer information onhow stocks rank within their respective industries. Check out:www.investors.com, www.valueline.com, my.zacks.com/index.php3, and www.stockworm.com. Nondigital ways to conduct the initialinvestigation can be found by consulting: Value Line InvestmentSurvey, Investor’s Business Daily, S&P Stock Reports and the Outlook.
3. Insider HoldingsKnowing if company insiders are buying or selling their company’s stock is an indicator that has proven helpful to investors in their decision making. Not surprisingly, insiders know better than anyone else whether a company’s earnings are likely toincrease or decrease. The Securities and Exchange Commission (SEC) defines corporate insiders as the officers, directors, and major shareholders who own more than 10%of a company