Analyzing Last Week's Noteworthy Insider Trades In Basic Materials And Energy

Includes: EOG, LYB, PXD, PZG, WFT
by: GuruFundPicks

We present here two noteworthy insider buys and three noteworthy insider sells last week (April 2nd to 6th, 2012) in the basic materials and energy sectors from over 1,300 separate SEC Form 4 (insider trading) filings during the 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):

Paramount Gold and Silver (PZG): PZG is a Canadian company engaged in the exploration and development of gold, silver and precious metals properties in Mexico and Nevada. On Tuesday, FCMI Financial Corporation, a Toronto-based private corporation controlled by Albert Friedberg and members of his family and insiders by virtue of their 10% ownership of PZG, filed SEC Form 4 indicating that it purchased 1.17 million shares for $2.4 million, ending with 16.74 million shares after the purchase (plus an additional 7.7 million common share purchase warrants). Insider purchasing activity has been strong recently at PZG with 0.30 million shares reported as being purchased by corporate insiders in March, and an additional 1.74 million shares purchased in January of 2012, compared to no additional purchases in the remaining nine months of the past year.

Lyondellbasell Industries NV (LYB): LYB is a Netherlands-based manufacturer of polypropylene compounds, propylene oxide, polyethylene, ethylene and propylene. On Tuesday, CEO James Gallogly filed SEC Form 4 indicating that he exercised options and sold the resulting 156,640 shares for $6.9 million, pursuant to a 10b5-1 plan, ending with 1.77 million shares after the sale (not including derivative securities). In comparison, insiders sold 0.63 million shares in the past six months. LYB has been trading up recently and is up almost 30% YTD, trading at 7-8 forward P/E and 2.3 P/B compared to averages of 12.0 and 2.8 for the diversified chemicals group.

EOG Resources (EOG): EOG is engaged in the production and marketing of crude oil and natural gas in the U.S., Canada, Trinidad, U.K. and China. On Monday, CFO Timothy Driggers filed SEC Form 4 indicating that he exercised options and sold the resulting 7,000 shares for $0.77 million, ending with 54,575 shares after the sale (not including derivative securities). In comparison, insiders sold 0.20 million shares in the past year. EOG trades at 15-16 forward P/E and 2.3 P/B compared to averages of 19.8 and 5.3 for its peers in the U.S. oil and gas exploration and production group.

Pioneer Natural Resources (PXD): PXD is engaged in the exploration and production oil and gas in the U.S. and South Africa. On Monday, two insiders filed SEC Forms 4 indicating that they sold 16,000 shares for $1.7 million, with Chairman and CEO Scott Sheffield exercising options and selling the resulting 10,000 shares, and EVP Mark Berg selling the remaining 6,000 shares. Insider selling has picked up recently at PXD, with 0.12 million shares sold in March. In comparison, insiders sold 0.19 million shares in the past year. PXD shares have been among the strongest performers in the oil and gas exploration and production group, rising to 10-fold since the depths of the 2008-09 meltdown. Its shares currently trade at 14-15 forward P/E and 2.4 P/B compared to averages of 15.6 and 5.2 for its peers in the oil and gas exploration and production group.

Weatherford Intl Ltd (WFT): Geneva, Switzerland,-based WFT is 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. On Wednesday, CFO John Briscoe filed SEC Form 4 indicating that he purchased 1,000 shares for $15,380, ending with 129,734 shares, the only insider purchase since May of last year. WFT is undervalued, trading at 7-8 forward P/E and 1.1 P/B compared to averages of 13.8 and 2.3 for its peers in the oil field machinery and equipment group.

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 10% or 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 non-public 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 may be 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 were based on SEC filings, Zacks Investment Research, Thomson Reuters and 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.