Is Continental Resources (NYSE: CLR ) headed higher or lower? That's the question we ask when we evaluate insider buying and selling. We ask because how executives spend their paychecks is often a reflection of what they think of their companies' prospects.
Of course, not all buys are equal. According to two decades worth of research from H. Nejat Seyhun compiled in his book Investment Intelligence from Insider Trading, buying is most predictive when it (a) comes from the CEO or other top-level executive, and (b) it's performed in bulk. Seyhun found buys of between 10,000 and 100,000 shares to be most informative.
How do Continental Resources' managers measure up against Seyhun's benchmarks over the past year? See for yourself:
|Insider Rating||Bearish: Not only has more stock been sold than bought over the past year, buyers were last seen at prices well below today's.|
|Business Description||Oil and gas producer operating in the Rocky Mountain, mid-continent, and Gulf Coast regions of the U.S.|
|CAPS Stars (Out of 5)||***|
|Percentage of Shares Owned by Insiders||73.38%|
|Net Buying (Selling)*||($575,672)|
|Last Buyer (% Increase)||
Harold Hamm, CEO
10,000 shares at $39.12 apiece on Aug. 25, 2010
(Increased direct holdings by less than 1%.)
|Last Seller (% Decrease)||
Jack Stark, Sr. VP of Exploration
30,486 shares at $56.27 apiece on Dec. 3, 2010
(Reduced direct holdings by 14%.)
Quicksilver Resources (NYSE: KWK )
Range Resources (NYSE: RRC )
Southwestern Energy (NYSE: SWN )
Sources: Form 4 Oracle, Capital IQ (a division of Standard & Poor's), and Motley Fool CAPS. (Data current as of Dec. 9.)
* Open market sales and purchases only.
What we're tracking here, and why
Insider buying data can be confusing. Here, I'm concentrating only on buying and selling conducted in the open market. With most of these transactions, insiders control the timing. Other times they're buying or selling under the purview of a 10b5-1 plan. Either way, personal holdings are being bought and sold.
Those personal holdings matter the most -- they're the shares executives hold for investment, rather than compensation. Employee stock options are different; they're compensatory in the purest sense. I've stripped out options-related buying and selling from the calculations you see above.
The Foolish view: bearish
With energy prices on the rise, oil and gas exploration is getting to a better business to be in. Oil slipped below $88 a barrel earlier today, but that's still up about 12% from the beginning of the year. Shares of Continental Resources are up 35% over the same period.
The underlying business is also improving. Revenue more than doubled in the first quarter and rose more than 40% in both Q2 and Q3. Analysts are calling for more of the same in Q4. Profits are expected to rise 64% during the same period.
Yet this isn't a "rising tide lifts all boats" type of story. Southwestern Energy is on track to report a modest decline in normalized fourth quarter earnings, while Denbury Resources (NYSE: DNR ) should see its profits more than double. In at least these three cases, positioning and management appear to matter more than the economic trends.
For Continental, outrageous growth calls for an outrageous multiple. Yet its 37 P/E ratio strikes me as perfectly reasonable given the company's recent track record and expectations for consistently high oil prices. (Higher prices create demand for new exploration.)
"Has a large position in North Dakota Bakken formation and has hit many wells and believe they have another formation under the Bakken called Three Forks which should increase reserves. CEO [Harold Hamm] has a very large position and I intend to ride his coat tails," wrote Foolish All-Star awdaniels last September.
Hamm still has a large position in his company's stock, and he's bought shares this year. But he was also buying at less than $40 per share. Now that the stock is up over $55 a share, sellers have arrived. Jack Stark, Continental's senior vice president of exploration, reduced his direct holdings by 14% in selling more than 30,000 shares earlier this month.
As a potential shareholder, that's not the sort of signal I'm looking for. Too many positive trends favor Continental to sell or short the stock. But with insider sponsorship fading, now's probably the right time to stay on the sideline.
Do you agree? Disagree? Log into Motley Fool CAPS today and tell us how you would rate Continental Resources. You can also add the stock to your watchlist.
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