By: Jake Mann
In the financial world, hedge fund sentiment is a metric that is underappreciated by retail investors, and the same can be said about insider buying activity. Research shows that both of these tactics can beat the market on a long-term basis (small to mid-cap picks), so this isn't something to simply shrug off. Of the 400-plus hedge fund managers we track, T. Boone Pickens is in the cream of the crop.
Unlike many of his peers, Pickens and his fund BP Capital hold a very concentrated equity portfolio, totaling 18 stocks as of his latest 13F filing with the SEC (full portfolio here). Some of the oilman-turned-hedge fund manager's top stock picks include Valero Energy (NYSE:VLO), Halliburton (NYSE:HAL) and Transocean (NYSE:RIG), but curiously, none of these companies have experienced any insider purchasing activity over the past 90 days.
In fact, there have only been two of Pickens' holdings that have seen bullish insider sentiment in this three-month time frame: Sandridge Energy (NYSE:SD) and Goodrich Petroleum (GDP). Sitting at the No.'s 10 and 14 spots in his portfolio, both oil and natural gas companies trade at market capitalizations below $3 billion, giving even more steam behind our bullish thesis. Generally speaking, hedge funds' small to mid-cap picks perform better than their larger investments, due to the fact that in-depth research about these stocks is less publicly available.
With Sandridge Energy and Goodrich Petroleum, Pickens obtains immediate exposure to gas-bearing properties in Texas, Oklahoma, Kansas, Northwest Louisiana and Southwest Mississippi. Sandridge's best holdings are in the Permian Basin and West Texas Overthrust, while Goodrich's primary focus is in the Haynesville and Eagle Ford shales, in addition to a particularly impressive play in the Tuscaloosa Marine region.
Shares of both companies are especially cheap on a price-to-sales basis, with Sandridge Energy trading at a 46% discount and Goodrich Petroleum trading at a 10.7% discount to the oil and gas E&P industry's average. At a mere 1.1 times its book value, Sandridge is cheaper than Goodrich (3.4x), Valero (1.4x), Halliburton (1.9x) and Transocean (1.3x).
It's clear which stock value investors would rather have: Sandridge Energy. But do Wall Street analysts agree?
Of the 26 analysts who cover Sandridge, 10 hold buy ratings and only two are bearish, while the group's average price target represents an upside of 20.7% from current levels. This sentiment compares favorably to Valero (6.6% upside), Halliburton (15.2% upside) and Transocean (9.7% upside). Goodrich Petroleum, meanwhile, is estimated to have a target about 13% higher than its current share price.
When considering our primary duo-Sandridge and Goodrich-T. Boone Pickens has held the former since we began tracking his hedge fund in Q4 2010, while he initiated his Goodrich position in the second quarter of last year. Having moral support from value investors and sell-side analysts alike is also a reason to lean toward Sandridge of this group, but insider sentiment throws a wrinkle into our analysis.
Over the past 90 days, Sandridge has seen one insider buy shares in eight separate transactions, while Goodrich has seen three executives buy shares in four total transactions. When tracking insider sentiment, it's typically a more bullish signal if multiple execs are initiating or boosting their holdings-consensus is king.
In Sandridge's case, it has been supported a great deal by Fairfax Financial, Prem Watsa's fund, which is classified as a "Large Shareholder" by the SEC, and thus, technically an insider. Here's the full recap of Fairfax's purchases, but it's worth noting that since its latest round of purchasing activity ended last December, shares of Sandridge have lost 6.9%.
Consequently, we can see that since Goodrich insiders Michael Perdue, Peter Goodson and Robert Turnham ended their recent string of buys on December 27th, shares of the company are up a whopping 49.4%. Much of this appreciation can be attributed to Goodrich's extremely positive drilling results, particularly in Mississippi.
Though this is only one recent case, it's a perfect example of why we follow multiple executives into companies they are buying, and why we think you should too.
Looking ahead, investors seeking to "monkey" T. Boone Pickens should start with Goodrich Petroleum for this very reasoning, but Sandridge wouldn't be a bad investment to pair it with. Sandridge offers the best value and Street support out of the duo, while Goodrich is a far better insider-driven momentum play.
Disclosure: I am long HAL.
Business relationship disclosure: This article is written by Insider Monkey's writer, Jake Mann, and edited by Meena Krishnamsetty. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.