Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) recently completed its purchase of oil and gas companies McMoRan Exploration (which had previously been a related company) and Plains Exploration and Production. The company’s stock price plunged in early December when it announced the acquisitions, and is still down 22% from the beginning of that month as markets have worried that the diversification into oil and gas will reduce Freeport-McMoRan’s focus (in addition to a belief that the company overpaid for these acquisitions).
Now a Form 4 filed with the SEC has disclosed that vice chairman of the Board James Flores purchased 1.1 million shares of the stock through a variety of affiliated limited partnerships on June 3rd at prices generally ranging from $31 to $31.50 per share. These LPs now own roughly 1.8 million shares of the stock, in addition to over 4 million shares held by Flores directly. As such, this buying activity increases his company-specific risk, while economic theory holds that it is generally rational for an insider to diversify their wealth away from the company unless they are particularly confident in its prospects. This is one explanation for why stocks bought by insiders tend to narrowly outperform the market (read our analysis of studies on insider trading).
Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) is generally seen as an indicator of broader economic activity (due to the dependence of copper demand on macro factors). The stock’s beta is 2.4, reflecting this. While the stock would certainly be a poor defensive pick, its quarterly dividend payments of 31.3 cents per share imply an annual yield of 4% at current prices- potentially making it quite appealing to income investors, though of course there would still be commodity and integration risks. Wall Street analysts project $4.07 in earnings per share next year, implying a forward P/E of 8.
In addition to insider trading activity, we also track quarterly 13Fs from hedge funds as part of our work developing investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year). We can see from our database of filings that billionaire John Paulson’s Paulson & Co. owned 9 million shares of Freeport-McMoRan at the end of March (see Paulson’s stock picks).