Expectedly, most shareholders of a company would want to see insider buying activity, as it usually shows insiders’ confidence in the company and its future prospects. As a general rule, insider buying is perceived as a bullish signal by the market and represents a sign of stock price appreciation in the forthcoming future. Extensive research shows that insider purchases tend to beat the broader market quite consistently over the years, so individual investors can capitalize on insiders’ ability to buy and sell stock at the right time. Insider trading behavior may be useful for ‘insider trading anomaly’ skeptics as well, as it can represent a tiny part of a broader stock selection and analysis process. Having said that, this article focuses on the insider buying activity witnessed at three companies and the recent performance of these 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.
Let’s kick off our discussion on insider trading behavior by looking into Devon Energy Corp (NYSE:DVN). Director John E. Bethancourt bought 10,000 shares on Friday at prices that ranged from $28.61 to $29.21 per share, lifting his overall holding to 27,770 shares. The shares of this independent energy company are down 51% so far in 2015, but some analysts believe that this company is well-positioned to endure the ongoing challenging environment and achieve a strong rebound should commodity prices settle higher. Devon Energy Corp (NYSE:DVN)’s strong balance sheet, good asset quality and attractive valuation will enable the company to outperform its peers when crude oil and natural gas prices rebound. In the meantime, roughly half of the company’s 2015 oil and gas production has been hedged at approximately $90 per barrel and $4 per Mcf, correspondingly. Earlier this month, Devon Energy announced the acquisition of 80,000 net surface acres in the Anadarko Basin STACK play for $1.9 billion and 253,000 net acres in the Powder River Basin for $600 million. These moves are aimed at strengthening the onshore producer’s “position in two of the best emerging North America development oil plays”. Israel Englander’s Millennium Management reported owning 5.85 million shares in Devon Energy Corp (NYSE:DVN) through its 13F for the third quarter.
Era Group Inc. (NYSE:ERA) reported insider buying this week for the first time in more than a year. Chief Executive Officer Christopher Scott Bradshaw snapped up 13,929 shares on Tuesday at a weighted average cost of $10.76 and currently owns 87,485 shares. The company primarily offers helicopter transportation services to offshore oil and gas production companies, so it is no wonder why its shares are 49% in the red this year. Nonetheless, Era Group, one of the world’s largest helicopter operators, also offers search and rescue, air medical services, utility services and Alaska flightseeing tours. The company’s total oil and gas operating revenues (account for 68% of its total operating revenues) for the first nine months of 2015 totaled $141.21 million, down from $180.14 million reported for the same period of 2014. This substantial decrease was mainly attributable to the decline in demand for helicopter services, as a result of decreased activity in the oil and gas production and exploration industry. Era Group experiences excess capacity in its medium helicopters and anticipates excess capacity in its heavy helicopters, so the company needs to put additional efforts in securing sufficient new projects to boost utilization. A number of 11 hedge funds from our database were invested in the company at the end of the third quarter, accumulating 20% of its outstanding shares. Richard Mashaal’s Rima Senvest Management lifted its stake in Era Group Inc. (NYSE:ERA) by 38% during the third quarter to 1.48 million shares.
Last but not least, Shell Midstream Partners LP (NYSE:SHLX) also saw one of its executives buy shares last week. Vice President of Operations Alton G. Smith purchased 3,435 shares on Friday at prices ranging from $37.56 to $37.62 per share, increasing his stake to 5,000 shares. This fee-based master limited partnership that owns and operates pipelines and other midstream assets has seen its shares decline slightly more than 1% this year. The MLP generates most of its revenues under long-term agreements by charging fees for transporting crude oil and refined products, so the company is not directly exposed to commodity prices. These long-term agreements provide stable cash flow streams that are not impacted by a reduction in volumes as a result of supply and demand dynamics. Nonetheless, a sustained long-term shift in crude oil supply and demand dynamics can adversely impact the demand for the MLP’s services. Shell Midstream Partners reported a revenue of $181.7 million for the first nine months of 2015, as compared with $126.8 million reported for the same period a year earlier. The number of hedge funds tracked by Insider Monkey with positions in the MLP climbed to 10 from eight during the third quarter, while the value of these positions grew to $39.07 million from $37.20 million. James Dondero’s Highland Capital holds 194,869 shares of Shell Midstream Partners LP (NYSE:SHLX) as of September 30.