Analysis: Discount employee stock plans offer outsiders trading tips

Wed May 15, 2013 4:53pm EDT
 
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By Tim McLaughlin

BOSTON (Reuters) - When investors unloaded their shares in Hewlett-Packard Co. (HPQ.N: Quote) last year, the computer giant's rank-and-file did the opposite. They bought nearly four times as much stock as they did in the previous year despite a raft of bad news.

It was a smart bet, and outside investors would have done even better than the insiders had they followed employees into the stock.

HP's stock is trading at a 27 percent premium over the average $17 a share price paid by workers during fiscal 2012. HP shares are up 53 percent since the company disclosed the results of its ESPP activity in late December.

Following a herd of thousands of HP workers does not seem like it would be a sound trading strategy. But when it comes to the buying patterns inside the discount employee stock purchase programs (ESPPs) offered by U.S. corporations to their employees, the wisdom of a crowd can be a barometer of future stock performance.

Recent academic research by Arizona State University's Ilona Babenko and Rik Sen of The Hong Kong University of Science and Technology found that companies in the top half of aggregate ESPP purchases outperform those in the bottom half by up to 8 percent in the year after purchases.

"Since ESPP purchases reflect the decisions of thousands of employees...they can provide a reliable signal of future performance," the researchers' working paper said.

SWEETENING THE DEAL

Those findings could become more pertinent going forward, as many firms now are sweetening the terms of their ESPPs, according to Kevin Barry, a stock plan services executive at Fidelity Investments.   Continued...