Insiders pulled out their collective debit cards – or maybe they use Apple pay now? – to the tune of more than $309 million last week. One hundred and twenty executives, directors, and institutions who are beneficial owners of at least 10% of the company bucked up during the week.
Some signed supersized checks.
Brain Randall Khan, Managing Partner and founder of Vintage Capital Management, and owner of more than 10% of Babcock & Wilcox Enterprises Inc NYSE: BW, was responsible for the largest transaction, buying more than 107 million shares of the fossil and renewable power generator’s stock at $0.32.
That’s a cool $32 million plus on a company that just went through a one-for-ten reverse split. In English, if you had 10 shares before the spilt, you have one now. The reverse split was to “allow B&W to meet the continued listing standards of the New York Stock Exchange, permitting a broader range of institutional and individual investors to participate in ownership of our shares,” according to CEO Kenneth Young.
Although anecdotal, experience says reverse stock splits usually don’t work out. An older study from Researchers at the Stern School of Business at NYU and Emory University showed that, on average, companies that reverse split their shares badly underperform the market. 2
- Year 1 – 15.6% underperformance
- Year 2 – 36% underperformance
- Year 3 – 54% underperformance
In our opinion, experience and empirical results of 1600 companies from 1962 to 2001 suggest taking a pass on following Mr. Khan’s lead.
One of our favorite angles is cluster buying. That’s when multiple people from the same company buy their company stock at the same time. The thinking behind cluster buying is that prospects are so obvious, everybody sees value in the stock price.
Unfortunately, the only cluster buy of interest was Eagle Point Income Company Inc. (EIC). The company is “an externally managed, non-diversified closed-end management investment company. The Company’s investment objective is to generate high current income, with a secondary objective to generate capital appreciation by investing primarily in junior debt tranches of collateralized loan obligations.” 3 In other words, junk bonds or below investment grades debt instruments. High risk, high reward stuff.
Eight directors, executives, and others associated with EIC purchased a total of 57.395 shares of Eagle Point Income for a $1,141,587 investment. Unless you understand the ins and outs of junk bonds and related derivatives, EIC is probably one to avoid, despite the cluster of buys. It is suitable for aggressive investors who seek high yields and can handle a high degree of downside if/when the economy sours.
In the days ahead, we’ll examine some major executive team and director buys.
- Larry Robbins bought $32 million of Tenet Healthcare Corporation (THC) .
- Bruce Booth, director at AVROBIO, Inc. (AVRO) purchased 810,811 shares at $18.50 for a total of $15 million.
- Air Products and Chemicals, Inc. (APD) CEO Seifi Ghasemi invested more than $9 million in 40,000 shares.
- Cadence Bancorporation (CADE) COO bought 30,000 shares for more than a half-million dollars.
- United Rentals, Inc. (URI) CEO Donald Roof picked up 5,000 shares at $118.27 for $591,362.
All are big bucks buys and warrant more investigation. We will identify which insiders have a great track record of acting on their stock in a profitable manner.