By Jake Mann
The term "smart money" has many different interpretations, but we at Insider Monkey like to take a multi-pronged approach. High-level insiders and hedge funds are two groups that fit this definition to a "T", and our research proves it. Insider buying activity has historically beaten the market by 7 percentage points a year, and hedge funds' consensus small-cap picks generate an annual outperformance of about 18 percentage points (read the details here).
We're going to take a sector-by-sector look at which stocks show the strongest support from the smart money. As a whole, the energy sector has been the worst performing area of the market over the past year, so it's crucial to determine which companies offer investors the best chance for stellar returns as we move through 2013.
Of the energy stocks with at least one insider buy over the past three months, Occidental Petroleum (OXY) has garnered the highest interest from hedgies with over 11% of the funds we track holding long positions. Since Director Baruyr Avedick Poladian bought a few hundred thousand dollars worth of his company's stock last December, shares have popped 18.5%. Occidental beat the Street's fourth quarter earnings expectations late last month, with domestic production driving growth. The company's positioning in the Monterey Shale offers investors another reason to be bullish, as Occidental is the largest oil and natural gas producer in California.
Hess (HES), meanwhile, has seen support from one high-level insider since mid-November, and shares of the integrated energy company are already up 26% since the start of 2013. Much of this appreciation has been a result of Hess's massive Q4 earnings beat reported late last month. Despite its recent gains, Hess's stock price still trades just a 6% premium to its book value per share, below the likes of Exxon Mobil (XOM), Chevron (CVX) and its own five-year average.
You're probably aware that Carl Icahn has a massive stake in Chesapeake Energy (CHK), but it's important to realize that the corporate raider has quite the support from the rest of the smart money as well. About 9% of the hedge funds we track are invested in Chesapeake; Icahn and activist Mason Hawkins hold roughly 140 million shares, or about one-fourth of the company's float.
Moreover, multiple insiders-Directors Frederic Poses and Brad Martin-have been buying over the past three months, and two bulls are always better than one. Since this round of purchasing activity began last November, shares of Chesapeake have risen by 17.7%. At a price below book value parity and a dividend yield near 1.7%, this energy play is still attractive for value and income-oriented investors alike.
Apache (APA) has nearly the same level of hedge fund interest as Chesapeake, and its stock price has risen 3.2% since executives Brady Parish Jr., Charles Pitman and George Lawrence began purchasing shares last November. Apache is also a high-conviction pick of Boykin Curry, David Dreman and Jim Simons. On average, Wall Street's consensus is predicting a 22%-23% upside from current levels, and earnings are expected to rise by 35.7% this year.
Last but certainly not least we have Weatherford International (WFT). About 7% of the funds we track hold long positions in this oil well servicer, and the company has seen a whopping seven different insiders purchasing stock over the past three months. Since Sr. VP Joseph Henry began this activity in mid-November, shares of Weatherford have gained 42.2%. This massive appreciation has rewarded mega-hedge fund managers like Dan Loeb and Steven Cohen, and the stock offers value at 1.2 times book and 0.7 times sales.