Overall, during the past week, corporate insiders traded a number of basic material, alternative energy and utility sector stocks, including buying shares in Pacific Ethanol Inc. (PEIX) and McMoran Exploration Co. (MMR), and selling shares in Cheniere Energy Inc. (LNG) and A123 Systems Inc. (AONE). This report, part of our weekly coverage of insider trades by sector (based on last week’s SEC Forms 3, 4, and 5 filings), summarizes last week’s major insider filings in the basic materials, alternative energy and utility groups (for a general discussion on how to interpret insider trades, please look at the end of this article):
Pacific Ethanol Inc. (PEIX): PEIX is engaged in the production, transportation, storage and sale of ethanol and wet distillers’ grain in the western U.S. Insiders currently hold 6.69 million shares or 11.6% of outstanding shares, and last week, two insiders reported buying a total of 125,000 shares. This included 100,000 shares bought by Director Larry Layne at 49c on Wednesday, and 25,000 shares bought by CFO Bryon McGregor at prices between 50c and 75c. Mr. McGregor’s last 10,000 share buy at 75c on Friday can be interpreted as a strong sign of his bullishness on the company and the ethanol group going forward, given that he bought the shares after a near double over the last four trading days. Over the past year, corporate insiders have not sold any shares, and they have bought 0.19 million shares during that period. Also, for our view on PEIX, you can refer to our recent articles in the past ten days after the company reported a good quarter, and after it retired most of its convertible debt recently.
McMoran Exploration Co. (MMR): MMR is engaged in oil and natural gas exploration and production in offshore Gulf of Mexico and U.S. onshore Gulf Coast area. Insiders currently hold 59.6 million shares or 37.6% of outstanding shares, including 51 million shares held by its peer oil and gas exploration and production company Plains Exploration and Production (PXP). On Tuesday, Advisory Director Gabrielle McDonald bought 3,640 shares at $11.85. Ms. McDonald has been gradually building her position in the company by adding 25,000 shares to her holdings during the past 12 months, and holds 41,765 shares of MMR after this transaction. Over the past year, corporate insiders have sold 2,750 shares, and they have bought 18,160 shares during that period.
Cheniere Energy Inc. (LNG): LNG operates LNG receiving terminals and natural gas pipelines in the Gulf Coast of the U.S,. including the Sabine Pass LNG terminal. We recently wrote about their landmark $8 deal for purchase of 3.5 million tons per annum (mtpa) of liquefied natural gas via its Sabine Pass terminal facility in LA, just prior to the stock jumping from the $8.30s when the article was published on October 26th to its close at $11.45 last Friday, after hitting an intra-day high of $12.56.
Insiders currently hold 9.26 million shares, or 13.1% of outstanding shares, and on Monday, Chairman, CEO and President of the company Charif Souki sold (automatic sale) 10,000 shares under a pre-existing 10b5-1 plan. However, what is more interesting in the case of LNG that perhaps supports the thesis of the predictive power of insider trading is that insider selling slowed down significantly in the last three months prior to the landmark deal announced less than two weeks ago. During the last three months, corporate insiders have sold 45,000 shares (buying none) at a fraction of the rate during the prior nine months when they sold 5.64 million shares (buying none).
A123 Systems Inc. (AONE): AONE manufactures rechargeable lithium-ion batteries and battery systems for transportation, utility and consumer markets. Insiders currently hold 3.6 million shares or 3.5% of outstanding shares, and last Tuesday CTO & CP of Research and Development Gilbert Riley sold (automatic sale) 30,000 shares under a pre-existing 10b5-1 plan. However, what is more interesting in the case of AONE (see LNG example above) is that insider selling has accelerated in the last three months as the stock has plummeted to all-time lows near $3. During the past three months, insiders have sold 128,281 shares (buying none), at a rate that is approximately 130% higher than the rate of selling in the prior nine months during which they sold 164,224 shares.
Exxon Mobil Corp. (XOM): XOM is engaged in the exploration, production, transportation and sale of crude oil and natural gas worldwide. Insiders currently hold less than 1.0% of outstanding shares, and last week five insiders reported selling (regular sale) a total of 75,482 shares at between $80 and $82 per share, all but 1,175 of which resulted from the exercising of options. The sellers included Director Steven Reinemund (1,175 shares), Sr. VP Mark Albers (20,000 shares), Sr. VP Donald Humphreys (17,307 shares), VP Stephen Pryor (24,000 shares), and VP Thomas Walters (13,000 shares). Over the past year, corporate insiders have sold 1.01 million shares, and they have bought 10,000 shares during that period.
Dupont De Nemours & Co. (DD): DD manufactures agricultural, food, building, communications, construction, electronics and other products and raw materials. Insiders currently hold 2.5 million shares or 0.3% of outstanding shares, and on Tuesday, two insiders reported selling a total of 56,468 shares the prior Friday. The selling insiders included Executive VP Thomas Connelly selling (regular sale) 36,668 shares, including 22,353 resulting from the exercise of employee stock options; and Executive VP James Borel exercised options and sold (automatic sale) the resulting 19,800 shares. However, what is more interesting in the case of DD (see LNG example above) is that insider selling has slowed down recently as corporate insiders have sold 56,468 shares in the last three months (buying none), at a rate that is approximately one-fourth of the rate of selling in the prior nine months during which they sold 591,482 shares.
Duke Energy Corp. (DUK): DUK provides electrical and natural gas utility services to about 4 million electric and 500,000 gas customers in the Americas. Insiders currently hold 4.7 million shares or 0.4% of outstanding shares, and last week Group Executive & CFO Lynn Good sold (automatic sale) 1,500 shares under a pre-existing 10b5-1 plan. However, what is more interesting in the case of DUK (also see LNG example above) is that insider selling has slowed down recently, which is particularly significant given the recent surge in the stock to near 10-year highs. Insiders have sold 10,161 shares in the last three months compared to their selling 96,145 shares during the prior year, and an estimated over 160,000 shares in the past two years.
Centerpoint Energy Inc. (CNP): CNP provides electricity transmission and distribution, natural gas distribution and sales, interstate pipelines and gathering operations to customers in AR, IL, IA, KS, LA, MN, MS, MO, OK TX and WI. Insiders currently hold 1.91 million shares or 0.5% of outstanding shares, and last week Director Milton Carroll sold (regular sale) 10,000 shares. However, just like in the case of its peer DUK above, what is more interesting is that insider selling has slowed down recently, which is particularly significant, given the recent surge in the stock to near 10-year highs above $21. Insiders have sold 2,757 shares in the last three months compared to their selling 382,100 shares during the prior year.
Chevron Corp. (CVX): CVX is engaged in the exploration, production and refining of oil and gas in the U.S. and worldwide. Insiders currently hold 0.86 million shares or 0.04% of outstanding shares, and on Monday, Director Charles Hagel sold (regular sale) 1,400 shares. However, what is more interesting in the case of CVX (see LNG example above) is that insider selling has slowed down recently despite the negative investor sentiment and weakening oil prices. During the last three months, corporate insiders have sold 1,400 shares (buying none) at a fraction of the rate during the prior nine months when they sold 228,750 shares (buying 10,000 shares).
Southwestern Energy Co. (SWN):SWN is engaged in the exploration and production of oil and natural gas primarily in AK, OK, TX and PA. Insiders currently hold 4.72 million shares or 1.4% of outstanding shares, and on Tuesday, Director Harold Korell exercised options and sold (regular sale) the resulting 100,000 shares. However, what is more interesting in the case of SWN (see LNG example above) is that insider selling has slowed down recently, even including the above 100,000 shares. During the last three months, corporate insiders have sold 100,000 shares (buying none) at a rate almost 60% lower than the rate during the prior nine months when they sold 696,700 shares (buying none).
General Discussion on Insider Trading
The reports in this series identify last week’s insider trades of noteworthy significance by sector or industry group, either by virtue of their timing, their size, the number of insiders buying or selling, based on who is buying or selling, or by the trend of their buys and sales over the long-term. The rest of the series by sector and by week can be accessed from our author page.
What is Insider Trading?: Insider trading as defined here (and by the SEC) includes not just corporate insiders such as company executives and key employees, but also directors and large shareholders that have access to non-public information. Large shareholders are defined by the SEC for this purpose are those that having beneficial ownership of ten percent of more of the firm’s equity securities (including institutional investors). Also, in the U.S., “insiders” are not just limited to corporate officials and major shareholders, but also when a corporate insider “tips” a friend about material non-public information, the duty the corporate insider owes the company is now imputed to the friend who is now in violation of a duty to the company if he or she trades on the basis of that information. The U.S. is generally viewed as having the strictest laws against illegal insider trading, and makes the most serious efforts to enforce them.
While most insider trading is legal, the term is commonly used to refer to the illegal kind when a corporate insider trades based on material non-public information that can have an effect on the company’s share price. By law, insiders are prohibited from trading based on nonpublic information, but most believe that such trading does occur around the edges. The thinking goes that corporate insiders, because of their access, have the most up-to-date information on the health of their companies and the industries they operate in. Investors, as a result, can benefit from the timely knowledge of insider transactions. In fact, one University of Michigan study found that when executives bought shares in their own companies, the stocks tended to outperform the total market by 8.9% over the next 12 months. Conversely, when they sold shares, the stock underperformed by 5.4%.
Timeliness of Information: Like in the 13-D and 13-G filings for Institutions, the SEC Forms 3 and 4 on insider filings are extremely timely, and hence of greater significance, as they must be reported within two business days of the trade.
Insider Buying More Informative than Selling: As a rule, insider buys are more informative than sells. This is because insiders sell often, and they sell for a variety of reasons that may be completely unrelated to the health of the company, including, for example, to diversity their holdings or to pay for an upcoming personal expense. In contrast, insider buying is relatively uncommon, and since they have an exclusive window into their own company’s performance, it is reasonable to presume that they probably have good reasons based on information at their disposal when they are risking their own assets to buy company stock.
Regular and Automatic Trades: Insider trades maybe regular trades, or they may be automatic trades made under SEC Rule 10b5-1. It is generally believed that regular insider share purchases and sales carry more predictive value as they are made voluntarily by the insiders. Conversely, trades made under SEC Rule 10b5-1, called “Automatic Buys” and “Automatic Sells”, are part of a pre-determined plan or contract, and it is assumed that the plan was created before the insider had any privileged non-public information. Generally, almost all automatic trades are sells, not buys.
Furthermore, even automated trades made under 10b5-1 have some informative or predictive value due to loopholes in the rule that, for example, allow the insider to cancel the trading plan without any penalty or legal liability. So, the insider could set up a 10b5-1 trading plan before they have inside information (for example, from a quarterly report and guidance) while retaining the option to later cancel the plan based on the inside information. So, in effect, the execution of an automated trade also carries some predictive value as insiders retain the option under the existing rules to cancel their trades without penalty or legal liability.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.