Insider Trading in Star Gas Partners LP (SGU)

Bandera Partners LLC, a large shareholder of Star Gas Partners LP (SGU), purchased 1 million common units of SGU at a price of $4.50 per unit, on September 16th. The total holdings of this insider increased to 8.57 million units, representing 12.5% of the outstanding common units.

Star Gas Partners is a small cap stock with a market capitalization of $320 million. Insider trading returns generally outperform the market returns simply because insiders are better informed than most investors. The advantage of insiders’ information is more pronounced in small companies. There aren’t many analysts covering small cap stocks, and whatever information is produced about small cap stocks is usually very limited. The result is that occasionally the market prices of small cap stocks might deviate significantly from their fundamentals, and insiders are the best positioned investors to detect and act on these mispricings in the marketplace. That’s why it’s not surprising to see insiders beating John Bogle’s Vanguard on the average by a large margin.

From 10-Q:

Star Gas Partners, L.P. is a home heating oil distributor and services provider with one reportable operating segment that principally provides services to residential and commercial customers to heat their homes and buildings. Star Gas Partners is a master limited partnership, which at June 30, 2010, had outstanding 68.3 million common units (NYSE: “SGU”) representing 99.5% limited partner interest in Star Gas Partners, and 0.3 million general partner units, representing 0.5% general partner interest in Star Gas Partners.

The Partnership’s operations are conducted through Petro Holdings, Inc. and its subsidiaries (“Petro”). Petro is a Minnesota corporation that is an indirect wholly-owned subsidiary of the Partnership. Petro is a Northeast and Mid-Atlantic region retail distributor of home heating oil that at June 30, 2010 served approximately 410,000 full-service residential and commercial home heating oil customers, and 10,000 propane customers. Petro also sold home heating oil, gasoline and diesel fuel to approximately 35,000 customers on a delivery only basis. In addition, Petro installed, maintained, and repaired heating and air conditioning equipment for its customers, and provided ancillary home services, including home security and plumbing, to approximately 12,000 customers.

SGU finished purchasing and retiring 7.5 million units of the partnership as of June 30th. On July 19, 2010, the Board of Directors of the Partnership’s General Partner authorized the repurchase of up to 7.0 million of the Partnership’s common units. This means that the partnership is planning to retire 10% of the outstanding units in the next 12 months. In addition to this, the stock has a dividend yield of 6.3%. During the first nine months of 2010 SGU had earnings of $0.53 per share in addition to the $0.15 per share earned during the last quarter of 2009. This puts the P/E ratio at a low 6.9 with a dividend coverage ratio of 43%. If they can maintain their profitability, this could be a very rewarding investment in this low interest environment. The large shareholder seems to think that way.