The past month certainly hasn't been one of "joy" for shareholders of service mining equipment manufacturer Joy Global (NYSE:JOY). The company's stock is down a whopping 14% since the beginning of September.
Yet, in spite of this recent dip, Joy Global investors have one potentially big positive they can point toward: steady recent insider buying at Joy Global, at least based on the insider buying data provided by S&P Capital IQ.
Why have insiders been piling into Joy Global? That's a question I fully intend to answer, but first let's have a quick look at the different types of insider actions because not all buys or sells are equally meaningful to investors.
There are four primary reasons insiders sell
Some investors view insider transactions, or trades executed by directors or executives of a company, as a strong indicator of where a company will head next. Insider selling, for instance, is viewed by some investors as a red flag and a reason to stay away from a particular stock. However, not all insider selling is inherently bad.
Tax-based selling, for example, is something you'll find happens quite often. After factoring in an executive or directors' salary and their bonuses, these individuals sometimes need to sell shares of stock to raise enough cash to pay their tax bill come April.
Similarly, insiders that are executing options and then subsequently sell the shares from those options may have no pessimism with regard to their company whatsoever. Remember, options have a finite lifespan, and it's not uncommon to see insiders executing these contracts before they expire worthless.
Also, insiders which have a vast majority of their wealth tied up in their company may choose to sell part of their ownership in an orderly fashion over time in order to diversify their own holdings. It's never a good idea to put all of your eggs in one basket, even if you own the company!
All of these aforementioned example are orderly selling events that shouldn't raise alarm with investors. The only really troublesome insider sale is the one in which a stock has been underperforming and/or insiders are selling out a large percentage of their ownership stake. Those are the unique instances where investors should perhaps dig a bit deeper.
But, there's only one reason they buy!
Luckily for investors, insider buying is pretty simple relative to selling. There's only one reason that insiders buy, and that's with the expectation that their company's stock is going to head higher. Based on insider data which is legally required to be on file with the Securities and Exchange Commission, Joy Global insiders have made 29 "buys" since the beginning of June.
Of course, it's still worth noting that while not all insider selling is necessarily bad, not all insider buying means a stock will head higher. Insiders, for instance, may choose to purchase their shares in an orderly fashion throughout the year. Some may buy on a monthly or quarterly basis in order to average in their ownership as opposed to buying in one lump sum. In other words, this type of buying could make it appear that things are much more optimistic than they actually are.
Furthermore, insider buying in itself doesn't guarantee that a stock will head higher. People like you and me, as well as millions of other investors, make up the stock market. The trades of a dozen or perhaps slightly more individuals is unlikely to be able to influence where a stock is going to head next.
Why insiders bought Joy Global
The way I view it, there were two primary reasons why Joy Global's insiders took the plunge, so to speak.
First, I believe the majority of the purchases were based on scheduled buying that's been broken up throughout the year. Most of the transactions involved the acquisition of less than 125 shares at a time, and these purchases were repeated on a quarterly basis, plus or minus a few shares. Keep in mind that orderly buying isn't a bad thing; it does demonstrate some degree of faith in Joy Global's business prospects. However, also keep in mind that these are relatively small buys that were probably predetermined months ago, thus it's difficult to get a bead on how optimistic management is about the intermediate future of Joy Global.
Secondly, the early portion of the summer months were modestly bullish for metal prices, thus insiders may very well have thought that the need for mining equipment could soon be on the rise. Gold prices rallied roughly $100/oz. between the beginning of June and mid-July. By a similar token, coal prices rallied from $52 per standard ton late last year to nearly $64 per standard ton by May 2014. Though neither was a staggeringly large move, it did give Joy Global's executives and directors the belief that demand for mining equipment could be set to rebound.
Where Joy Global is headed next
However, fast-forward a few weeks and that optimism has turned into an all-out commodity price crash and burn. Gold prices are less than 1% away from breaching a multiyear low as of this writing, coal prices are below $52 per standard ton, silver is at its lowest point in four years, and a number of other commodities are on the decline. It's worth noting that coal sales make up more than 60% of Joy's total sales, but overall things aren't looking very good for the company in the interim.
Joy Global's second quarter results were downright abysmal, with its net income tumbling to $71.3 million from $183.2 million in the year-ago period, and revenue falling 34% to $875.7 million. Both estimates badly missed Wall Street's already low expectations. Yet CEO Edward Doheny proclaimed during the quarter that he'd seen signs that a trough in the sector was shaping up. That bottom looks to now have fallen out on Mr. Doheny.
Though the strength of the U.S. dollar has played a role in weakening a number of commodities, perhaps the bigger instigator here for Joy Global has been a weaker-than-expected growth environment in China. China is a vacuum when it comes to demanding commodities ranging from metals to coal and oil. However, China's GDP growth has dipped well below its three-decade average annual growth of 10% and came in at 7.5% as of the second quarter. While this is still robust growth, China's slowing housing price growth coupled with the fact that the economy has grown increasingly reliant on government spending has investors clearly worried that its demand may shrink further.
Until we see discernable improvement in China's economy, we're probably unlikely to see a notable rebound in order for Joy Global's mining equipment orders. Don't get me wrong; that doesn't mean you shouldn't have Joy Global high on your watchlist as the company is able to command excellent pricing power for its equipment in strong economic environments. But, I would realistically look at a complete turnaround in Joy Global's fortunes as still being a few years out.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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