There may be a lot of reasons corporate insiders sell shares of their company, but there appears to be only one straightforward reason for insiders to channel their hard-earned money towards buying their company’s stock in the open market. Stock market watchers need to pay close attention to insider buying activity, mostly because these highly-informed individuals have a better understanding of their company’s business and have a good feel about future industry conditions. Corporate insiders, especially top-tier executives, have up-to-date insights about upcoming marketing campaigns, industry conditions, possible future transactions, and other issues surrounding their company. Of course, insiders are restricted from trading on material non-public information, but it is almost impossible to restrict insiders from making well-timed and highly-informed purchases in equity markets. Corporate insiders are well aware of the harsh consequences of being involved in illegal insider trading, but they can have their own perception of how undervalued or overvalued their companies are and they can use that perception to trade equities. With that in mind, this article will discuss the insider buying activity registered at three publicly-traded companies.
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 imitating the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012 (read more details here).
Let’s kick off our discussion by examining the insider buying activity witnessed at Holly Energy Partners L.P. (NYSE:HEP), which had its most influential executive purchase shares this week. Michael C. Jennings, Chief Executive Officer of Holly Logistic Services LLC, which the general partner of HEP Logistics Holdings LP (the general partner of Holly Energy Partners L.P.), purchased 12,851 shares on Tuesday and 2,149 shares on Wednesday at prices that ranged from $32.90 to $33.75 per share, boosting his holding to 29,948 shares. Holly Energy Partners is a limited partnership that owns and operates petroleum product and crude pipelines, terminal, tankage and loading rack facilities, and refinery processing units that deal with refining and marketing operations of HollyFrontier Corporation and Alon USA’s refinery. The company primarily derives revenues from tariffs associated with the transportation of petroleum products and crude oil through its pipelines, and from fees related to the storage of refined products and other hydrocarbons. Holly Energy Partners L.P. (NYSE:HEP) generated total revenue of $358.88 million in 2015, which increased from $332.55 million in 2014 and $305.18 million in 2013. The $26.3 million increase in 2015 was mainly driven by annual tariff increases, higher pipeline shipments, as well as additional revenue from several crude tanks and refinery processing units acquired last year. To be more detailed, the company’s pipeline volumes increased 21% year-on-year in 2015, mainly due to higher volumes from the expansion of the New Mexico gathering system. Net income increased to $148.33 million in 2015 from $113.81 million in 2014 and $86.08 million in 2013. Earlier this year, the company’s Board of Directors declared a cash distribution of $0.565 per unit for the final quarter of 2015 (equates to a current annualized yield of 6.68%), which increased 6.6% year-on-year. This increase marks the 45th consecutive quarterly distribution increase. A mere five hedge funds tracked by Insider Monkey had stakes in HEP at the end of December 2015. Jim Simons’ Renaissance Technologies acquired a new stake of 108,527 shares in Holly Energy Partners L.P. (NYSE:HEP) during the December quarter.