Last week (May 14th to 18th, 2012), insiders made noteworthy buys (see definition below) in two plunging energy stocks and one plunging mining stock, and noteworthy buys in several other basic materials and energy companies (a prior article on last week's noteworthy buys in biotech and other healthcare stocks can be accessed by clicking on the above hyperlink).
Insider buys, especially unusually large ones, in such stocks that are beaten down and trading near their lows, may give bulls comfort that the long-term fundamentals may be intact and that a turn may be under-way in the next couple of quarters; sells, on the other hand, at depressed prices after the plunge may lend even further credence to the bear thesis. Similarly, noteworthy buys in surging stocks may give investors some confidence that knowledgeable insiders are finding value at such elevated prices after a strong surge.
The transactions in this article were selected based on a review of over 2,200 separate SEC Form 4 (insider trading) filings last week, 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):
Thompson Creek Metals (TC): TC is a Canadian producer of molybdenum and other precious metals from mines in the U.S. and Canada. Last week, on Tuesday and Friday, two insiders filed SEC Forms 4 indicating that they purchased 54,000 shares for $0.20 million, with the large majority (53,000 shares) purchased by Director Denis Arsenault, who ended with 145,336 shares after the purchase. In comparison, insiders purchased 121,400 shares in the past year.
TC shares have been in a down-trend since the beginning of last year, with the latest sharp down-move happening the week before last, on Monday, when the company reported a disappointing Q1 (March), with revenues down 45% and earnings down 97% year-over-year (1c v/s 36c). The shares have been in a free-fall since the beginning of May, now down almost 50% YTD, and it is in this context that the insider buying reported last week is significant.
Hess Corp. (HES): HES is a global integrated oil and gas company engaged in the exploration, production, refining, transportation and marketing of oil and gas worldwide. On Thursday, Director Ernst Von Metzsch filed SEC Form 4 indicating that he purchased 20,000 shares for $916,760, a new position in his portfolio, and in comparison to 0.36 million shares purchased by insiders in the past two years.
HES reported its Q1 (March) four weeks ago, on April 25th, beating analyst revenue and earnings estimates ($1.60 v/s $1.56). Its shares, however, have moved about 18% lower since the report, trading at 5-6 forward P/E and 0.8 P/B compared to averages of 8.5 and 1.5 for the U.S. integrated oil and gas group, while earnings are projected to rise at 15.2% annual rate from $5.75 in 2011 to $7.63 in 2012. Also, it has a dividend yield of 0.9% compared to the 1.3% average for the group.
EV Energy Partners LP (EVEP): EVEP is a MLP engaged in the acquisition, development and production of oil & natural gas properties in the continental U.S. On Wednesday, CEO Mark Houser filed SEC Form 4 indicating that he purchased 2,000 shares for $113,780. EVEP shares have been moving lower, down by almost a third from the highs ten weeks ago, with the fall accelerating to the downside since the company reported its Q1 (March) the week before last, on Wednesday, in which it missed analyst revenue estimates ($78 million v/s $82 million).
In addition to the above three, insiders also reported noteworthy buys last week in the basic materials & energy sectors in:
- Continental Resources Inc. (CLR), an independent oil & natural gas exploration & production company with operations in the north, south, and east regions of the U.S., in which Chairman & CEO Harold Hamm filed SEC Form 4 indicating that he purchased 100,000 shares for $7.2 million, in comparison to 103,000 shares purchased by insiders in the past year;
- Plains All American Pipeline (PAA), that is a MLP engaged in the transportation, storage, terminalling and marketing of crude oil, refined products, and liquefied petroleum gas and other natural gas-related petroleum products in the U.S. and Canada, in which Director Gary Petersen filed SEC Form 4 indicating that he purchased 5,000 shares for $0.40 million, ending with 11,250 shares after the purchase;
- Williams Companies (WMB), that is an energy infrastructure company that owns and operating approximately 13,700 miles of natural gas pipeline system in the U.S., in which Director John Hagg filed SEC Form 4 indicating that he purchased 10,000 shares for $0.30 million, a new position in his portfolio (not including derivative securities), and in comparison to 13,500 shares purchased by insiders in the last two years;
- Cliffs Natural Resources (CLF), that is a mining and natural resources company that produces iron ore pellets, lumps and fines iron ore, and metallurgical coal products, in which Director Andres Gluski filed SEC Form 4 indicating that he purchased 1,290 shares for $71,971, increasing his holdings to 5,622 shares, and in comparison to 9,570 shares purchased by insiders in the past two years;
- Oil field equipment and services provider Weatherford International Ltd. (WFT), in which SVP Dharmesh Mehta filed SEC Form 4 indicating that he purchased 5,000 shares for $62,500, ending with 0.23 million shares after the purchase; and
- Uranerz Energy Corp. (URZ), that is engaged in the acquisition, exploration and development of uranium properties in the Wyoming Powder River Basin area, in which EVP & COO George Harman filed SEC Form 4 indicating that he purchased 10,000 shares for $11,200, the only insider purchase in 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.
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.