Basic Materials Sector: Analyzing Noteworthy Buys And Sells By Insiders Last Week

by: GuruFundPicks

Overall, during the past week, corporate insiders traded a number of stocks in the basic materials sector, including energy stocks. This included significant share purchases by corporate executives in Kronos Worldwide Inc. (NYSE:KRO) and Transatlantic Petroleum (NYSEMKT:TAT), and multiple insiders sells in Dupont De Nemours & Co. (NYSE:DD) and Murphy Oil Corp. (NYSE:MUR). 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 sector (for a general discussion on how to interpret insider trades, please look at the end of this article):

Biofuel Energy Corp. (NASDAQ:BIOF): BIOF is a holding company engaged in the production and sale of ethanol and distillers grain in NE and MN. Insiders currently hold 24.8 million shares or 23.9% of outstanding shares. Last week, Cargill Biofuels Investments LLC, 10% beneficial owner of the company’s shares sold 1.2 million shares, ending the week with 10.2 million shares. This is in addition to the 1.1 million shares that we reported Cargill sold last week. Overall, insiders sold a total of 2.3 million shares in the past three months, and a total of 6.5 million shares during the past year (buying none). BIOF shares, along with its peer ethanol play Pacific Ethanol Inc. (NASDAQ:PEIX) have been surging recently, both up more than five-fold in the last two weeks, so the sale by BIOF insiders last week could be interpreted as a sign that insiders may not be as sanguine about the company at current prices.

Kronos Worldwide Inc. (KRO): KRO manufactures titanium dioxide pigments that provide whiteness, brightness, opacity and durability to products such as coatings, plastics and papers, as well as specialty products such as inks, food and cosmetics. Insiders currently hold 21.4 million shares or 18.5% of outstanding shares. Last week, two insiders bought a total of 107,000 shares for $2.1 million. This included Chairman of the Board Harold Simmons (100,000 shares) and CEO Steven Watson (7,000 shares). This is significant in that insiders bought only an additional 17,000 shares in the past year (selling none).

Transatlantic Petroleum (TAT): TAT is engaged in crude oil and natural gas exploration and production in Turkey, Morocco, Bulgaria and Romania. Last week, CEO N. Malone Mitchell III bought 368,338 shares for $0.5 million, increasing his holdings in the company to 1.7 million shares. This is the only insider trade in the last three months, and over the past year insiders bought 1.6 million shares and sold 0.2 million shares.

Crosstex Energy LP (XTEX): XLEX is a MLP engaged in gathering, transmitting, treating, and processing of natural gas and natural gas liquids in the U.S. Insiders currently hold 7.7 million shares or 15.8% of outstanding shares. Last week, Director Sheldon Lubar, sole manager of Lubar Equity Fund LLC, sold 320,036 shares (regular sale) for $5.2 million. This is significant given that insiders sold only an additional 52,510 shares in the past year (buying 388,000 shares).

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. Last week, three insiders reported exercising their options and selling the resulting 177,808 shares (all regular sells) for $8.6 million. The selling insiders included Chairman & CEO Jamison Kullman (136,860 shares), EVP & CFO Nicholas Fanandakis (15,800 shares) and EVP Mark Vergnano (25,148 shares). The sale last week is in addition to the 56,468 shares that we reported two insiders sold just two weeks ago. This is significant in that it is an acceleration of selling activity given that insiders had no other trading activity in the past three months, and they sold only a total of 743,982 shares in the past year (buying none).

Murphy Oil Corp. (MUR): MUR is engaged in the exploration, production, refining and marketing of oil and gas in the U.S. and U.K. Insiders currently hold 2.7 million shares or 13.9% of outstanding shares. Last week, four insiders exercised options and sold a total of 70,517 shares (regular sell) for $3.9 million. This is significant given that insiders sold only an additional 281 shares during the last three months, and they sold a total of 630,332 shares (buying none) during the past year.

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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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