Insider Buying and Flowing Capital

insider buying

Investors are piling back into stocks with momentum solid green in a frenzy. Capital inflows are getting stronger. This follows months of investor speculation over rising interest rates and two months of worries over Russia-Ukraine. 

Beaten down stocks like Lordstown Motors (RIDE), Electric Last Mile Solutions (ELMS), and Virgin Galactic (SPCE) are rallying. A headline at Seeking Alpha boasts: “Cathie Wood’s ARKK triples the return rally of the S&P 500 over the past two weeks.

All this tells us is that speculative capital is back off the sideline in a major way. Wood is a momentum investor, and although we see a rally – I wish we would see some insider buying. I still maintain that it’d be much more comforting if corporate insiders at the companies in which Wood invests were also buying their stock at current levels. Alas, most insiders are still staying off the sideline. 

The last two days have witnessed a significant rotation of capital out of the energy and materials space. This capital has been redirected into consumer cyclical, telecommunications, and technology stocks. This isn’t surprising. As the markets monitor “progress” around the Russia-Ukraine conflict – the wave of speculative capital that fueled big moves in commodity prices in the last six weeks is now transitioning back to capture some short-term gains on more speculative names. 

Energy Fundamentals

Oil prices pulled back again Tuesday on news that Russia was pulling back troops from Kyiv. In addition, reports indicated that Russia and Ukraine had made progress on peace talks. Meanwhile, China’s new lockdowns could reduce demand in the short term on the demand side. 

Despite this short-term move, I continue to remind readers that the fundamentals for higher oil prices are in place. Moreover, the U.S. isn’t sitting on significant reserves ahead of a busy driving season. 

The Securities Exchange Commission just submitted new rules that would require all public companies to track their carbon emissions and examine their energy sources. This is a very dramatic expansion of regulatory oversight. It will likely increase domestic energy prices over time (as shareholders likely push for more renewable energy use).

But the bigger story is that ESG efforts are starving capital from the expiration space when renewable sources are incapable of replacing baseload capacity for our energy systems. More importantly, most solar and wind sources aren’t poised to make a dent into the primary use case of oil: Transportation. 

United States Oil Production

In the U.S., the Department of Energy projects that oil and gas use will go UP over the next three decades. Meanwhile renewable sources primarily tackle the electricity generation part of the energy supply. 

With oil prices increasing (and the cost of capital surging for oil and gas producers), most traditional oil producers refuse to increase their production. Many companies don’t want to expand drilling – a capital-intensive business. Some producers have said they won’t even drill if the price of U.S. crude increases to $200 per barrel. 

Instead, they are content to use available cash flow to increase dividends, extend buybacks, or pay off debt. The problem doesn’t extend to U.S. producers. This is happening around the world. And it’s likely to accelerate in the years ahead. Moody’s said last November that the global oil-and-gas industry is short about $500 billion in capital required to produce enough oil to meet global demand. 

This is a major challenge. As the Fed continues to raise interest rates and the economy faces higher oil prices in the future, it’s important to maintain some caution despite this recent rally.

When Insider Buying Goes Bad

Yesterday, I highlighted the movement of ORIC Pharmaceuticals (ORIC) after a big move on Monday. Months after shares fell more than 80%, the CEO stepped in and purchased $1.74 million in shares. The purchase precedes an upcoming conference where the company provides three presentations on the progress of various drugs in production. 

Remember – this insider buying is legal. The insider buying that I highlighted requires filing a FORM 4 document with the Securities Exchange Commission. In the case of a FORM 4 document, the executive notes that they have bought or sold stock with their own money. 

That can’t be confused with “Insider Trading”. That’s an illegal practice where someone uses inside (non-public) information to make a trade and profit. Take the case of Twilio, a software company. 

This week, the SEC charged three engineers with using and sharing confidential information with friends and family around the company. With this non-public information, this group traded their company’s stock ahead of its May 2020 earnings report. 

They made $1 million by trading the stock on this information. Just remember, we buy what the CEO and the CFO are buying. We shake our heads at the people who still think they can get away with insider trading in today’s heavily monitored world.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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