We present here six noteworthy insider buys and three sells in the basic materials and energy sectors from Monday through Friday's (May 7th to 11th, 2012) over 1,850 separate SEC Form 4 (insider trading) filings, as part of our daily and weekly coverage of insider trades. The filings are noteworthy based on the dollar amount sold, the number of insiders buying or selling, and based on whether the overall buying or selling represents a strong pick-up based on historical buying and selling in the stock (for more info on how to interpret insider trades, please refer to the end of this article):
Pioneer Natural Resources (PXD): PXD is engaged in the exploration and production oil and gas in the U.S. and South Africa. On Wednesday, Director Arthur Thomas filed SEC Form 4 indicating that he purchased 1,000 shares for $104,500, increasing his holdings to 20,956 shares in direct and indirect holdings. In comparison, insiders purchased 4,300 shares in the past two years.
PXD reported its Q1 (March) the week before last, on Wednesday, beating analyst revenue estimates by a huge margin ($883 million v/s $742 million), and also beating earnings ($1.23 v/s $1.22). The next day, FBR Capital raised the target to $140. However, its shares, that have been stellar performers, rising to 10-fold since the depths of the 2008-09 meltdown, dipped down post-report by about 12% in sympathy with the rest of the energy group. At 13-14 forward P/E and 2.3 P/B, the stock currently trades at a discount to averages of 15.6 and 5.2 for its peers in the oil and gas exploration and production group.
Cliffs Natural Resources (CLF): CLF is a mining and natural resources company, producing iron ore pellets, lumps and fines iron ore, and metallurgical coal products. It operates six iron ore mines in MI, MN and eastern Canada; two iron ore mining complexes in western Australia; five metallurgical coal mines located in WV and AL; and one thermal coal mine in WV. On Friday, EVP Kelly Tompkins filed SEC Form 4 indicating that he purchased 1,500 shares for $85,771, increasing his holdings to 23,506 shares in direct and indirect holdings. In comparison, insiders purchased 8,280 shares in the past two years.
CLF reported in its Q1 (March) at the end of April, missing analyst revenue and earnings estimates by wide margins, with earnings also down year-over-year. The shares have plunged since the report, now down about 20% post-report, and currently trade at 5-6 forward P/E and 1.3 P/B compared to averages of 7.0 and 34.4 for its peers in the iron mining group.
Furthermore, insiders also reported noteworthy buys last week in the basic materials and energy sectors in:
- Clean Energy Fuels Corp. (CLNE), founded by famed energy investor and hedge fund manager Boone Pickens, that provides natural gas as an alternative fuel to vehicle fleets in the U.S. and Canada, in which Director James Miller purchased 4,900 shares for $81,095, the first insider purchase on record at least in the past two years;
- Tesoro Corp. (TSO), engaged in the refining and marketing of petroleum products in the mid-continental and western U.S., in which Director Jim Nokes purchased 3,000 shares for $65,420, in comparison to 16,235 shares purchased by insiders in the past two years; and
- Geneva, Switzerland-based Weatherford Intl Ltd (WFT), a leading provider of equipment and services used in the drilling, evaluation, completion, production and intervention of oil and natural gas wells to independent oil and natural gas producing companies worldwide, in which Chairman & CEO Bernard Duroc-Danner purchased 4,000 shares for $54,400.
On top of these, insiders also reported noteworthy sales last week in the basic materials and energy sectors in:
- Valero Energy Corp. (VLO), an independent petroleum refining and marketing company operating through three segments: refining, retail and ethanol, in which Director Ruben Escobedo sold 11,200 shares for $0.25 million, in comparison to 54,450 shares sold in the past year;
- Transocean Ltd. (RIG), a provider of offshore contract drilling for oil and gas wells worldwide, in which two insiders sold 9,116 shares for $0.43 million; and
- Royal Gold Inc. (RGLD), that owns and manages royalty interests in precious metal, mainly gold and silver, in 14 countries, in which Director Stanley Dempsey sold 5,000 shares for $0.29 million, in comparison to 16,919 shares sold by insiders in the past six months.
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.
Credit: Fundamental data in this article and company descriptions are based on SEC filings, Zacks Investment Research, Yahoo, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.