Energy Insiders Are Backing Up The Truck

Investors are a fickle sort. As I’m writing this, it’s looking like the Dow and S&P 500 will be down sharply today following news that the coronavirus is spreading faster than previously thought. But just yesterday, we had one of the biggest one-day point moves in this entire multi-century history of the stock market.

It’s hard to draw meaningful conclusions from that kind of buying and selling. No one can argue with a straight face that the people jumping in and out of the market like that are making informed decisions. Investors aren’t whipping out an Excel spreadsheet and updating their discounted cash flow stock valuation model with each new coronavirus headline. To even pretend that would be utterly ridiculous. The average investor has no idea what impact a virus outbreak will have on a company’s sales, let alone what that should imply for the share price.

If you want information you can actually use, watch the trading activity of the people running the companies. The SEC requires all company officers, directors, and shareholders owning 10% or more of a company’s voting shares to disclose any dealings they have in their company’s stock. If the CEO of the company is buying – or selling – the stock of the company he manages, the SEC believes the investing public has a right to know.

Company insiders tend to be fairly decent value investors. They don’t get every bend and twist in the stock price right, but they tend to be large buyers near major market bottoms. And near tops, their buying tends to trail off.

This makes sense. If anyone has a reasonably good idea of what a company is worth, it ought to be the people running it.

Now, I should make a distinction here. I’m not talking about stock buybacks. Companies tend to be awful allocators of capital, buying back shares when prices are inflated and issuing new shares when prices are depressed. Stock buybacks are actually often a contrary indicator.

I’m also not talking about executive stock options or other stock-based compensation.

I’m talking instead about the company officers whipping out their checkbooks and buying their company stock with their own money.

The February sell-off wasn’t quite deep enough to bring out the value investors across the S&P 500. But within the energy sector, company insiders are tripping over themselves to buy as much of their own stock as they can get their grubby little hands on.

In February, energy insiders bought six shares of their own stock for every one share sold. Insider buying spiked near the bottom of the 2008 meltdown and again near the bottom of the 2015-2016 energy bust. But today’s insider buying makes those other buying sprees look tame by comparison.

Let’s look at a few examples. On February 28, Richard Kinder – Founder and Executive Chairman of Kinder Morgan (NYSE:KMI) – bought 300,000 shares of his own stock for around $5.7 million. This followed another 300,000-share purchase two days earlier by Mr. Kinder for $6.2 million.

Kinder also purchased 1.2 million shares in the fourth quarter of last year. To say the man is committed would be an understatement.

Not to be outdone, Kelcy Warren, the billionaire founder and CEO of pipeline rival Energy Transfer (NYSE:ET), bought 300,000 shares of his own stock on February 28 for $3.2 million. This followed a massive 4-million-share purchase the day before for a whopping $42.5 million.

And earlier in the month, on February 19, Warren dropped another $45.2 million buying 3.6 million shares.

Kelcy Warren dropped over $90 million of his own money into to the stock last month. Now, granted, the man is a billionaire. But that $90 million he added was in addition to the roughly $3 billion he already owned. The vast majority of Warren’s fortune is tied up in his company stock. You think he’s not motivated to make those shares move higher?

I picked two high-profile companies as examples, but they’re certainly not the only ones. Across the energy sector, insiders are backing up the proverbial truck.

Now, none of this guarantees that the share prices soar higher tomorrow. Prices may very well stay low for a while, particularly if demand from China slows due to the coronavirus outbreak.

But when I see this kind of insider buying, it makes me think that having some high-yielding energy stocks in the portfolio makes sense.

Disclosures: Long KMI, ET

Disclaimer: This article is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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