Investors love to see insiders buying a company's stock, as this is almost always a bullish sign. One company that recently showed up on a screen of high insider buying is Oiltanking Partners LP (NYSE:OILT). In the third quarter alone insiders made 19 buy transactions representing more than 95,000 units without selling any units. That's a lot of insider buying considering that a total of 41 buy transactions had been made over the past year, representing just over 105,000 units.
However, that simple screen doesn't come close to telling the whole story, and with the added benefit of hindsight we'll see that the insider buying at Oiltanking Partners didn't even signal at what would come next at the company.
Drilling down into insider buying at Oiltanking Partners
When we look closer at the insider buying during the third quarter we see two interesting themes. First, some of the actual insider buying at Oiltanking Partners over the past three months has been from automatic buying plans that the CEO, CFO, and a director have in place. These automatic buys are usually for around a few hundred units so it's pretty minor. The rest of the insider buying transactions were the result of non-open market unit grants the company gave to insiders in July. These grants are part of the company's compensation to the company's officers and directors.
Because all of the insider buy transactions were either automatic or given away to insiders, it doesn't exactly suggest outright bullishness by the company's insiders. That being said some of grants in July substantially increased the unit ownership of these insiders with the CEO's position growing by 75% to more than 41,000 units and the CFO's position growing by 74% to just over 18,500 units. So that at least suggests that insiders are much more aligned with outside investors than they were previously. That being said, with the benefit of hindsight we see an entirely different story unfolding at Oiltanking Partners.
The benefit of hindsight
Just after the quarter closed, the company's largest insider, Oiltanking Gmbh, sold its entire stake in the company. That stake represented two-thirds of Oiltanking Partners' outstanding units as well as its general partner interest, which was sold to Enterprise Products Partners LP (NYSE:EPD) for $4.41 billion in cash and units. After making that deal, Oiltanking Gmbh will own units of Enterprise Products Partners instead of units of Oiltanking Partners.
In addition to buying out the company's largest insider Enterprise Products Partners has proposed to acquire the rest of the units it doesn't own. With Enterprise Products Partners now in control it has made some changes that really show that insider buying doesn't always signal that insiders are bullish on a company's future. This was clearly evident when Oiltanking Partners announced that its CEO and CFO had resigned and would be immediately replaced. The new CEO had been a senior executive at Enterprise Products Partners so the move was made to better align Oiltanking Partners' interests with Enterprise's interests. In light of this news it really diminishes any bullish hint that the insider buying might have signaled over the past quarter.
Typically insider buying is a bullish sign for a stock. However, that clearly does not appear to be the case at Oiltanking Partners as all of its insider buying in the past quarter was either automatic or given to insiders by the company as compensation. Further, the company's largest insider sold its entire ownership stake in the company, representing two-thirds of the company's outstanding units, and the CEO and CFO resigned shortly thereafter. This just goes to show that we can't use high levels of insider buying as a reason to buy a stock because even the insiders don't always know what's coming next.
Matt DiLallo owns shares of Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.