Here’s a fun hypothetical question. How can an investor tell whether a beaten-up company is going to recover? There are many reasons. Perhaps the company is on the cusp of developing something new, which will help sales. Perhaps the company is in a struggling sector, and all it needs is for the business cycle to pick up the sector again. Or, much to the chagrin of investors, sometimes the company will be doing everything right and the market still won’t give it credit. There are countless examples of value stocks lagging for years before finally heading higher. Or, in the…
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Here’s a fun hypothetical question. How can an investor tell whether a beaten-up company is going to recover?
There are many reasons. Perhaps the company is on the cusp of developing something new, which will help sales. Perhaps the company is in a struggling sector, and all it needs is for the business cycle to pick up the sector again. Or, much to the chagrin of investors, sometimes the company will be doing everything right and the market still won’t give it credit. There are countless examples of value stocks lagging for years before finally heading higher.
Or, in the case of beleaguered oil and gas producer Penn West Petroleum Inc (TSX: PWT)(NYSE: PWE), you can take a look at what insiders are doing with their own wallets. And lately, those wallets are lighter because the cash is being used to buy Penn West shares. Here’s a summary of insider transactions over the last month.
- On November 6, Director James Smith bought 400 shares.
- On the same day, CEO David Roberts bought 5,000 shares.
- Between November 6 and November 20, Director Richard George bought 52,500 shares.
- CFO David Dyck bought 53,650 shares between November 6 and November 27.
- Director John Brydson made a big splash on December 1, buying 150,000 shares.
- And finally, George Brookman, another Director, bought 2,000 shares on November 12.
All together, that’s 263,550 shares!
The shares purchased are not options, grants, or anything issued by the company. These insiders went out on the open market, and used their own money to purchase stock.
What does this mean?
On the surface, it’s obvious Penn West insiders are bullish on the company’s stock. Since top execs tend to have a pretty good handle on the company they run, this should bode pretty well for the future of the stock.
Throughout the last few decades, various studies have been commissioned to look at this very issue more closely. With a few exceptions, these studies have been consistent in their findings — company insiders tend to outperform individual investors. Insiders tend to be contrarian, buying when things look bleak, which tends to lead to their outperformance.
The data is pretty clear on that, but with a catch. It turns out that the insiders who do the best are the ones buying small, obscure, under-followed companies. That’s where the knowledge difference between insiders and the public really shines. After all, large companies are so well covered these days that it’s possible thousands of investors know those businesses well. That takes away the knowledge advantage, which leads to lackluster returns for insiders.
How about Penn West?
There are plenty of things to be bullish about with Penn West.
The company has been cutting costs aggressively, chopping some 20% off its expenses compared to last year. It has also sold nearly $1 billion worth of assets in 2014 alone, and will continue selling assets in 2015 assuming it can get a decent price. Even after asset sales the company still expects production to increase in 2015, and continue to do so at an average increase of 13% annualized until 2018.
Management has also stated the company expects to stay the course until a couple of quarters into 2015 to wait and see how the oil market is going to shape out, which sounds like investors can expect at least a couple more dividends. That’s assuming, of course, oil doesn’t go down any further.
Ultimately, Penn West is a play on higher oil prices. From a value perspective the company trades at just a fraction of its tangible book value, but that’s only if oil recovers to a normalized level. If we’re looking at all of 2015 at $60 oil, Penn West could be in trouble, and those undervalued assets might not be so cheap after all. But if oil recovers in 2015, Penn West insiders could end up making a lot of money.
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Fool contributor Nelson Smith owns shares of PENN WEST PETROLEUM LTD..