Many investors hear the term "insider trading" and immediately assume illegal conduct. In fact, insiders such as officers, directors, and beneficial owners may legally buy and/or sell stock in their organizations, provided they do not do so based upon privileged information and that they report their trades to the SEC within two business days.
Insider activity is often worth observing. While such activity is not a pure indicator of when to buy or sell a stock, it is a good starting point, upon which to perform analysis, or a method of validating analysis already performed. Insider activity might provide an accurate profile of business prospects, based on the insiders' knowledge of the company and industry.
In choosing a high yield investment, it must be understood that an above average yield may be an indicator of above average yield. This is especially of concern now, as investors are being forced to look for high yielding equities to supplement the income portion of their portfolios due to the historically low rates of interest available in the fixed income markets. As such, one might prefer to consider those higher yielding equities that also have signs of increased insider activity and/or a generally high percentage of insider ownership.
Below are seven companies had a reasonably high level of insider buying within 2011. Several of the names are real estate investment trusts (REITs) or oil & gas trusts/partnerships (MLPs), types of equities that are often renowned for their pass-through accounting and above average yields.
Chesapeake Lodging Trust (CHSP)
- Business: High-end Hotel/Lodging REIT
- Market Cap: $547 million
- Yield: 4.5%
- Activity: Insiders purchased over 600,000 shares or about 2% of the float. Insiders, nonetheless, own a small portion of CHSP.
Crosstex Energy LP (XTEX)
- Business: Oil & Gas pipeline MLP focusing on North Texas & Louisiana
- Market Cap: $923 million
- Yield: 6.3%
- Activity: Insiders purchased over 175,000 shares or about 0.7% of the float. Insiders and 5% owners now own about 34% of XTEX.
Eca Marcellus Trust I (ECT)
- Business: Oil & Gas drilling royalty trust
- Market Cap: $471 million
- Yield: 7.8%
- Activity: Insiders purchased over 200,000 shares or about 1.65% of the float. Insiders and 5% owners now own about 23% of ECT.
Hudson Pacific Properties, Inc. (HPP)
- Business: Office REIT focusing on California
- Market Cap: $519 million
- Yield: 3.1%
- Activity: Insiders purchased over 1.2 million shares, or about 5.5% of the float. The primary purchase price appears to be $14.60. Insiders and 5% owners now own over 40% of HPP.
Inland Real Estate Corp. (IRC)
- Business: Retail REIT
- Market Cap: $784 million
- Yield: 6.3%
- Activity: Insiders purchased over 430,000 shares or about 0.5% the float. The majority of purchased were made at or around $9 per share.
KKR Financial Holdings LLC (KFN)
- Business: Financial Asset Management
- Market Cap: $1.75 billion
- Yield: 6.5%
- Activity: Insiders purchased over 1.1 million shares or about 0.75% of the float. Insiders and 5% owners own about 15% of KFN.
Winthrop Realty Trust (FUR)
- Business: Diversified REIT
- Market Cap: $391 million
- Yield: 5.5%
- Activity: Insiders purchased nearly 200,000 shares or about 0.75% of the float. Insiders and 5% owners now own about 12% of FUR.
While all of these companies had a reasonably large amount of insider buying, certain of the names jump out as exceptionally large insider buys. In particular, HPP's insiders added about 5.5% of the float to their position and insiders and 5% owners now own over 40% of the REIT. Insider ownership of XTEX and ECT are also relatively high and offer two of the more attractive yields. ECT is a relatively new publicly traded royalty trust and these numbers may change over time.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Investments should be considered on their own merit and relative to the total portfolio of investments.
