Before appearing on BNN's Business Day AM with Amber Kanwar and Jon Erlichman today, we wrote up a note for the show covering some key trends in the market and how insiders are positioning themselves. The background note was fairly extensive and we couldn't possibly cover it all in 7 minutes on television. But, I thought it would be worth sending the material to our readers because it covers a lot of ground, focusing on both institutional and speculative situations in the market.
The replay of the interview is now on the BNN website. If you missed the interview, you can watch it here: http://www.bnn.ca/video/insider-trading-trends-in-canadian-heavyweights~...
Market trends and the insiders
We use three tools to assess how insiders are reacting to key market trends in Canada. The starting point is the semi-annual rebalancing of the INK Canadian Insider Index (Bloomberg: INKCINP Index; tracked by the Horizons Cdn Insider ETF HII) which takes place in November and May each year. This index captures the 50 stocks that insiders like that have good value or price momentum using our INK Edge outlook criteria. The Index is restricted to stocks that institutions can invest in. Since going live on November 14, 2014, the Index is up 10.93% on an annualized total return basis versus 5.18% for the S&P/TSX Composite Index (as of Friday).
The second tool is our monthly Top 40 rankings of all stocks, including Venture names. We use the same value, insider commitment, and price momentum criteria as we do for the Index but we open it up to all stocks, not just stocks for institutions.
Finally, at the sector and industry levels we look at our sentiment indicators which give us a read of whether insiders are generally buying or selling the sector.
So, what do these three insider gauges tell us about three key developments in the Canadian market, namely, the staying power of mining and banks stocks and the outlook for the lagging Energy sector?
Mining and Basic Materials stocks
While insiders cut back their exposure to the Basic Materials sector last November during the Index rebalancing, the sector remained a favourite in the Index with a 16% allocation, split among gold and industrial miners and building materials. Meanwhile, mining stocks continue to be a dominant force in our Top 40 reports with both gold and industrial miners competing for top spots. Finally, our gold indicator jumped two weeks ago to 200% meaning there were twice as many stocks with key insider buying as there were with selling.
Three names to keep an eye on in the Basic Materials sector:
Barrick Gold (ABX) - our top ranked major producer and INK Canadian Insider Index member. In fact, it is the only major producer that ranks in the top 30% of all stocks in Canada. Unlike some other major producers, insiders have not been selling, even as the stock has rallied 22% over the past 3 months.
Goldcorp (G) - the only other major in the top half of our rankings. There has been a small amount of insider buying over the past 6 months ($73,000) and there is a relatively high degree of officer and director share ownership (0.6% of shares outstanding) for a large player.
Ivanhoe Mines (IVN) - Robert Friedland's Ivanhoe is up 176.2% over the past 6 months and is our top ranked stock in Canada and a contender for the INK Canadian Insider Index May rebalancing. This is all about insider ownership, not insider buying. Friedland owns 21.5% of the shares outstanding.
The fact that Ivanhoe grabs the spotlight suggests that diversified miners could be the story for 2017 in the Basic Materials Group. While Ivanhoe is known for its DRC copper projects, it is also working on its South Africa Platreef project which the company believes would be among the largest platinum-group metals mines in the world. In a world facing the potential of both rising inflation and geopolitical tension, 2017 may well become known as the Robert Friedland market.
With insiders tilting towards global reflation, banks should benefit as investors expect loan margins to improve. That is what we have seen in the Canadian market as the major banks make new highs in 2017. After a good run, insiders are sending mixed signals for all the major banks. No major bank falls in the top 30% of our rankings and only two make it into the top 50%
TD Bank (TD) - our highest ranked major bank as it leads the majors in terms of officer and director equity holdings. In fact, CEO Bharat Masrani holds 617,418 shares worth $42.6 million, making him by far the CEO with the most skin in the game.
BMO (BMO) - not in the top 50%, but it is on the borderline. As the stock has rallied over the past 6 months, 10 insiders have taken profits, selling $26.1 million worth of stock. CEO William Downe owns $28.9 million in stock.
CIBC (CM) - the stock is not only lagging its peers in terms of returns but also in terms of our signals. Over the past 6 months, 7 insiders have sold $19.1 million in stock into the pubic market. CEO Victor Dodig owns $2 million worth of equity.
While Energy stocks have lagged in 2017, insiders are not giving up on them. Energy grabbed a 20% allocation in the fall Index rebalancing. Energy names also started to grab some top spots in our Top 40 lists this year. Meanwhile, our Energy sentiment indicator stands at 179%, well above the 100% level, meaning there are more stocks with insider buying in the group than there are with selling. That said, the indicator is well off the highs of more than 400% seen last winter. Bargains are now much harder to find.
Stocks to watch in the sector:
Suncor (SU) - the stock has a mixed outlook, but it is notable that this week the former head of Manulife, Dominic D'Alessandro, bought 30,000 shares in a $1.245 million purchase. Offsetting that, however, is a sale of 130,000 shares by CEO Steven Walter Williams after he exercised options.
Calfrac Well Services (CFW) - this stock is our highest ranked oil and gas service provider and has a shot at joining the Index this spring. The company operates through four geographical segments: Canada, the United States, Russia, and Latin America. Its services include hydraulic fracturing, coiled tubing, cementing, and other well stimulation services. In December, director Ronald Mathison spent buying $10 million in a financing.
Laramide Resources (LAM) - This was our top ranked Energy stock in our latest Top 40. Notably, it is a uranium explorer with projects in both Australia and the United States. Over the last 6 months, four insiders have spent $421,773 buying shares in the market or via a prospectus offering.
While there are examples of profit-taking in the Energy sector, there seem to be a number of stock-specific situations out there that insiders still find attractive. With the low-hanging fruit picked from last year, company-by-company situations will likely be key to investing strategies in the months ahead. Given the "America First" thrust of the Trump administration, uranium explorers with US assets could continue to be in fashion as speculation mounts as to how the US will live up to its Paris Agreement commitments.
Disclosure: My household owns shares in Ivanhoe Mines and INK has a business relationship with a division of the TD Bank, and with Horizons ETFs.