Brent crude oil reached an 11-year low earlier this week, dragging down energy-related equities even lower for the year. Some analysts believe that oil prices will stabilize next year despite facing a sustained supply glut, while others believe that the prices of this commodity can go even lower. Insider trading watchers should have already noticed that the energy sector has been witnessing extremely high insider buying activity lately, which might suggest that energy stocks are poised to rebound in the forthcoming future. In fact, literally every corner of the energy industry has witnessed heavy insider buying; insider buying was reported at companies with both global and U.S. exposure, at exploration and production companies, at energy services and pipeline companies. Although I am not an expert on the energy sector, it is quite evident that energy-related companies will endure more pain before it gets better. Nonetheless, corporate insiders definitely have a more in-depth knowledge about the energy sector than most of us, and their trading behavior suggests that this sector is set to recover over the medium-run. With that in mind, this article discusses the insider buying activity reported at three energy-related companies and the recent performance of those companies.
Most investors can’t outperform the stock market by individually picking stocks because stock returns aren’t evenly distributed. A randomly picked stock has only a 35% to 45% chance (depending on the investment horizon) to outperform the market. There are a few exceptions, one of which is when it comes to purchases made by corporate insiders. Academic research has shown that certain insider purchases historically outperformed the market by an average of seven percentage points per year. This effect is more pronounced in small-cap stocks. Another exception is the small-cap stock picks of hedge funds. Our research has shown that the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward testing the performance of these stock picks since the end of August 2012 and they have returned 102% over the ensuing 38 months, outperforming the S&P 500 Index by more than 53 percentage points (read more details here). The trick is focusing only on the best small-cap stock picks of funds, not their large-cap stock picks which are extensively covered by analysts and followed by almost everybody.
Plains GP Holdings LP (NYSE:PAGP) saw an insider buy a sizable block of shares this week. Director John T. Raymond bought 423,954 Class A shares on Monday at a price of $7.4 per share, lifting his overall holding to 573,954 shares. This Delaware limited partnership owns an interest in the general partner and incentive distribution rights (IDRs) of Plains All American Pipeline L.P. (NYSE:PAA), which owns and operates midstream energy infrastructure and offers logistics services for crude oil, natural gas liquids (NGLs), natural gas and refined products. Plains GP Holdings LP (NYSE:PAGP) recognized net income of $593 million for the first nine months of 2015, as compared with $958 million reported for the same period of 2014. The decrease was mainly attributable to the sluggish performance of its Supply and Logistics segment, which was impacted by the compression of differentials from the transitioning crude oil market and toughening competition (which pushed unit margins lower). However, the stock trades at a very appealing forward price-to-earnings ratio of 9.29, which is substantially below the average of 17.19 for the companies included in the S&P 500 Index. The number of hedge funds from our database with positions in the company climbed to 27 from 23 during the third quarter, amassing 7.10% of its outstanding common stock. Daniel S. Och’s OZ Management upped its stake in Plains GP Holdings LP (NYSE:PAGP) by 14% during the September quarter to 9.25 million shares.