Insiders Aren't Omniscient

According to market maven Peter Lynch, outside investors can get the inside scoop on a company's health by imitating the executives already on the inside. If the company itself, or its top executives, are buying its shares, that presumably means the company and its management believe its shares are undervalued. That's a buy signal.

Except when it isn't.

For months now, I've been watching with interest as the Monday morning edition of TheWashington Post (NYSE: WPO  ) faithfully reported the continuing stream of open-market purchases of shares from software company ePlus (Nasdaq: PLUS  ) . These weren't token buys, either. On one recent June day, investors Steven and Eric Hovde laid down a combined $758,680 to boost their stakes in ePlus. On dates before and after that, they made additional purchases well in excess of $500,000.

These buys have continued all the way up through the present day; together, the Hovdes now own roughly 14% of ePlus' shares outstanding. If these two gentlemen, who presumably have a better view of the company's inner workings than you or I do, were laying down megabucks buying even more of the stock, then the upcoming quarter's earnings release was just about guaranteed to knock the market's socks off, right?

Wrong.

ePlus finally reported its fiscal Q1 2006 earnings Monday morning, and while the numbers weren't abjectly horrible, Mr. Market's socks haven't gone anywhere. Investors liked hearing about the company's 40% top-line growth, but were decidedly less impressed with profits' 40% year-over-year decline. Similarly, the company's happy news of a 4% drop in shares outstanding was somewhat overshadowed by the 43% tumble in cash levels as the company reacquired shares and paid off debts.

At last count, ePlus shares were trading 5% lower than they were 72 hours ago. That's almost certainly not what Messrs. Hovde, or their outside investor-imitators, had had in mind.

Fool contributor Rich Smith owns no shares in any of the companies mentioned in this article.