Last November and December, many believed the oil crash had hit bottom, and a horde of insiders bought shares in their own companies.
I’m not talking about just a few thousand shares, either… They scooped up hundreds of thousands of shares – ultimately betting millions on oil’s imminent rise.
Continental Resources Inc (NYSE:CLR) CEO Harold Hamm, for instance, purchased 71,000 shares for $67 each in September!
But just after the buying spree, the price of crude oil dropped another $20 per barrel, and only recently has it started to recover.
So what are we to think? Clearly, these insiders were fooled by a false floor. Here’s what we can learn from their blunder…
Following the In-Crowd
Insider buying is one of the best indicators of the future success of a company’s share price. Especially when insiders buy in clusters, as it shows conviction within the management structure.
Obviously, insiders at a company are privy to information that outsiders aren’t.
Thus, when they trade on that information, they must follow strict rules that restrict when they can sell. Generally, insiders can’t sell for at least six months after they’ve made their purchases.
Most insiders don’t buy shares to trade, however. They buy because they see long-term value in their company. Buying shares is a way to participate in that value creation.
Here’s a list of companies that saw substantial insider buying. It includes the price point close to where they bought, and where shares are trading today…
Unfortunately, the insider track record, for the most part, isn’t looking very pretty…
Foolhardy Play or Methodical Move?
It could be too early to pass judgment, but it’s rare that insiders buy too early, as they did in the case of the energy price collapse.
Judging by the sheer volume of trades in November and December, they were buying with the hopes that oil prices had bottomed in the $60s. But as we all know, they fell below $43 a few weeks later and have only recently been able to trade around $50.
Of course, the question is… how can individual investors stand a chance in the energy patch when the insiders themselves haven’t been able to call a bottom?
It’s a lesson in investing in a commodity-based sector, really.
Companies can have the best management, the best properties, and the best intentions. But, when the market price of the underlying commodity is something you have no control over, then you’re flying just as blind as everyone else during an adjustment or panic period.
There’s something more powerful to be gleaned here, however.
Heavy insider buying identifies the few companies out there with management who’s confident enough in their abilities to put their own money at risk with open market purchases.
Those are the companies that deserve your attention. Insiders are rarely wrong about their purchases over the longer term.
And the chase continues,