Insiders Are Scooping Up This Oversold Stock… And So Am I

One of the most common discussions among investors is whether you can really beat the market and how much information is already baked into stock prices. 

Technicians say they can follow historical patterns to make money on fast trades. Fundamental analysts say they can make money on careful analysis of public filings. The “indexers” say all historical and public information is already reflected in prices, so there’s nothing new to be earned from analysis. 

All of these arguments are pretty hard to prove one way or another. But there is one thing they all agree on: Insiders have the information that moves stocks. 

#-ad_banner-#That’s why insiders must file multiple reports with the Securities and Exchange Commission (SEC) about their relationship to and ownership of the company. And that is where one of my favorite stock-picking clues comes in. 

Corporate officers, directors and any beneficial owner with more than 10% of a company’s shares must file Form 3 with the SEC within 10 days of the beginning of their relationship with the company. They must then file Form 4 within two days of any change in ownership, including buying or selling shares. 

When investors get their hands on these filings, it can often move stocks. 

Case in point: Pandora Media (NYSE: P) surged 16.6% on Nov. 14 when CEO Brian McAndrews reported the purchase of 25,000 shares at $18.58 each. While the stock has given back some of its gains, his purchase has helped keep shares above that price.

Insiders Load Up on Beaten-Down Energy Stock 

Looking through SEC regulatory filings, I found a company that is seeing some very interesting insider buying: C&J Energy Services (NYSE: CJES)

This small-cap provider of hydraulic fracturing and other oil-field services has been hit along with the rest of the industry as oil prices fell 30% from their June peak. 

CJES is off nearly 45% since its July high, but one investment firm is backing up the truck to load up on shares. 

Independent Director Adrianna Ma, who is also a managing director of investment firm General Atlantic, has picked up $19.6 million in shares since the beginning of November at an average price of $18.37. These purchases, made for General Atlantic, brought total ownership to just over $180 million, or about 17%. 

Not only does General Atlantic want a bigger piece of the company, but it seems the smart money is firmly behind C&J Energy. Institutional and mutual fund owners hold 98% of the shares outstanding, along with 11% of the shares held by insiders. 

The company is well-managed, and operational efficiency has helped to improve margins even against macroeconomic headwinds. Thanks in part to stronger utilization and cost controls, the company reported a 270-basis-point improvement in third-quarter EBITDA margin. Revenue increased by 20% from the prior quarter to $440 million, and the company has seen double-digit sequential revenue growth all year. 

C&J announced in June that it would acquire the completion and production services business of Nabors Industries (NYSE: NBR) to create the fifth-largest hydraulic fracturing services company in North America. The deal takes CJES out of the small-cap space and makes it a real player with 683 workover rigs and the largest fluids management fleet in the United States. 

Shares trade for just 0.8 times sales, half of the 1.6 multiple average across the industry, according to Morningstar. The company’s size is set to jump with the completion of the Nabors acquisition toward the end of the year. C&J Energy currently has a market cap of $1.03 billion against a total consideration of $2.14 billion for the Nabors division. 

Booking a Quick Profit on Insider Support 

There are several reasons why insiders buy shares of a company’s stock. It might be as a sign of confidence after a long slide in the price. It may be on strong prospects for the shares going forward, or it could just be as a way to show their loyalty. 

Regardless, it usually means a jump in the share price and strong near-term support on improved investor sentiment. But rather than simply buying shares outright, I plan to use a covered call strategy. Here’s why… 

Looking out a month or two, strong insider buying will often help support shares above the price insiders paid. If I set the strike price for the call options I’m selling near this price, there is a good chance shares will remain above it and I can book a quick profit. 

With CJES trading near $19.20 at the time of this writing, we can buy 100 shares and simultaneously sell a CJES Jan 19 Call, which is trading around $1.60 ($160 per contract). This gives us a net cost of $17.60 per share. This represents an 8.3% discount to the current price, and it is 4.2% below the average $18.37 per share General Atlantic paid over the past month. 

If CJES remains above the $19 strike price at expiration on Jan. 17, our shares will be sold for that price. In this case, we will make $1.40 per share for a profit of 8% in just 52 days. If we were able to make a similar trade every 52 days, we could earn a 56% rate of return in a year. 

I like the trade as long as we can get in for a net cost of $17.90 or less, which still leaves us with a gain of more than 6% in less than two months and an attractive discount to the current price. 

If CJES is below $19 at expiration, we keep the shares and the option premium. We then have the opportunity to sell another call against the shares to generate more income and lower our cost basis further. 

While companies in the oil field services space have taken a hit this year with the drop in energy prices, the longer-term outlook remains strong as the U.S. energy revolution continues to be a major theme. This is why a covered call trade is ideal. With this strategy, traders can generate income on solid stocks while waiting for them to appreciate. In fact, passing on this income seems almost crazy. 

My colleague Amber Hestla likens selling covered calls to collecting rent on a property you own. It wouldn’t make much sense to own extra properties and not use them to generate income, right? Well, you could argue that it doesn’t make sense to own shares and simply pass on the income that is available to you each month. 

Amber has helped her followers earn an additional $1,200 or more each month from the stocks they own. If you’re interested in doing the same, check out her presentation.