With the financial press all agog about the insider purchases of General Electric (NYSE:GE) by Chairman Jeffrey Immelt (relayed in our March 5 instablog of top insider trades), we thought it was important to point out that there are plenty of other (and, in our opinion, better) insider-bought investment ideas to be had right here and now.
We've added 15 new stocks to our recommended list in the past two weeks, as insiders correctly signaled that February's dip was well worth buying. But General Electric wasn't one of them, since insiders alerted us to numerous other stocks we thought had better risk/reward profiles.
Our March 5th instablog of top insider trades also highlighted another purchase at a different low-risk/moderate-return candidate that recently made it in our portfolio over GE: Western Gas Partners (NYSE:WES).
Western Gas Partners
There have been plenty of periods during the 10-plus years that we have published that our service has been (correctly) overweight energy in the form of both E&P plays and MLPs. We're overweight again now, with Western Gas representing a lower-risk/moderate-return candidate.
Western Gas is a midstream MLP that gathers, stores and transports natural gas, oil and related liquids via assets located across the U.S. We bought units of WES opportunistically last December, after the stock took a predictable hit when it announced another secondary offering.
Buying into a secondary-induced dip is a typical entry strategy for us when its comes to MLPs, BDCs and the like. Since such firms must pay out the bulk of profits to their unit holders, they have to resort to secondary offerings to fund expansion. The dilutive secondaries immediately, and understandably, take their toll on share prices.
When we see insiders buying significantly into the stock-weakening secondaries, however, it tells us that they fully expect their share prices to recover and benefit from the added growth the added capital will generate. This insider pattern has been a dependably profitable one to follow.
In the case of Western Gas, two directors increased their holdings by between 10% and 14% buying into December's secondary. Both directors have excellent track records with their past purchases. For both insiders, WES rose more than 83% of the time a year after their numerous past buys. And the average return for the pair after a year was at least 26%. (See our InsiderInsights profile for WES to view these Insider Statistics.)
There was also a significant cluster of insider purchases back in May of last year during a previous funding event. This is indicative of insiders' persistent bullishness in WES.
And on March 5th, Western Gas' parent, Anadarko Petroleum (NYSE:APC), acquired nearly $19 million worth of WES as partial consideration for an acquisition of assets by Western Gas from Anadarko. Though certainly not a typical insider purchase, the other nine times Anadarko acquired shares of Western Gas WES was up 100% of the time after one year. And the average return of WES a year after was 36%.
Astute readers may be confused that the transaction code for WES' most recent insider purchases is JB* instead of a clearly open-market code of B. That is because, even though all of these recent insider transactions are portrayed as being open market on their form 4s, we do some checking on the fly as we ingest the raw data from the SEC.
We demote transaction types from B to JB* when our programs determine that a trade couldn't be an open-market buy, usually because the stock did not trade at the price indicated on the form 4 that day, or the number of shares on the form 4 are inconsistent with the trading volume that session. The demotion does not mean that JB* transactions can't be used profitably when analyzing insider histories. But it's very useful to know as much as possible about a transaction at a glance, so you don't waste time during your insider analysis.
In the case of WES' recent transactions, the two insiders purchased via a secondary from the company last December at a greater price than WES fell to in the market on December 3, 2013. And Anadarko acquired WES as per a contribution agreement for a bit less than the stock traded for on March 3rd. Anadarko's 308,490 share acquisition is also more than the 290,200 share trading volume shown for WES on that day.
All these nuances of tagging and analyzing insider data are taken into account by our algorithms, which digest them to generate a single Insider Company Rating for a stock. If a stock ranks significantly bullish from an insider perspective, it qualifies to be analyzed fundamentally and technically. Only if a name passes all three tests will it make it on our newlsetter's recommended list.
Western Gas met our criteria back in December, and it does again right now. Anadarko's recent purchase has generated another significantly bullish insider rating on WES, and the company's Q4 results beat expectations for the third quarter in a row.
Adjusted EBITDA for the period increased 31% year-over-year, to $129 million. For all of 2013, adjusted EBITDA rose 21%, to $458 million. Western's all-important distributable cash flow per unit increased 16% in 2013, to $2.28.
And while this MLP's latest quarterly payout of 60 cents puts WES' indicated yield at only 3.8% (which is low compared to most of the midstream MLPs we've bought into in the past), Western Gas bills itself as a "growth-oriented" MLP, and has lived up to that description by giving its investors a capital return of 16% in the past year.
A prospect with 20% total return potential doesn't make Western Gas the most exciting insider-generated idea these days compared with the various biotechs and special situations we've recently bought into. But for more conservative investors, WES looks at least as promising as the much discussed, also insider-bought GE.
Disclosure: I am long WES. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.