On May 15, 2017
AAM Viewpoints – Commodity Weakness Brings Insiders In Buying Hand Over Fist
The last three months of 2017 have witnessed a significant correction in the commodity markets. As global growth moderated a bit, energy and materials turned lower. These markets went from bear to bull in 2016 and now many investors are wondering if energy and materials have run their course.
History tells us that bull markets in commodities generally last for a number of years rather than a number of months. In fact, bull markets that follow elongated bear markets tend to have the greatest potential for a multi-year expansion. However, every bull market has corrections contained within it and we believe this one in the energy and materials sectors is no different. What has changed over the past few weeks is a marked increase in large purchases of stocks by insiders, which may be an indicator that the end of the correction may be near.
Many folks doubted the bounce we saw in the commodities markets last year. They tried to tie the recovery to the U.S. Presidential election. There was talk of a “strong dollar” which could reverse the commodity move. What we believe they missed is the fact that the turn in global commodities matched a turn in global economic growth. Even though growth moderated in the United States in the first quarter of 2017, global economic growth continued to be stronger. During elongated bear markets in commodities, current supplies are depleted and there is little to no capital deployed to find new supplies. As demand rises against static or depleting supplies, prices rise. The markets turn when demand turns. We suggest that the trends that we saw begin last year are still intact, and recent insider buying of equities tends to embolden us to expand our exposure at this juncture.
We have seen insider buying in names such as iron ore miner Cliffs Natural (CLF); in oil names like Superior Energy (SPN), Occidental Petroleum (OXY), SM Energy (SM) and Parsley Energy (PE). Beaten down energy servicers have seen significant buying such as Carbo Ceramics (CRR) and Nabors Industries (NBR). Even highly levered gas companies such as Chesapeake Energy (CHK) have seen waves of purchases. Outside of energy and materials we see companies like Mosaic (think fertilizer) (MOS) report cluster buying by management. We are not suggesting that our readers purchase these names, we are just pointing out the overwhelming support by management to purchase shares in the open market. Insiders are often in the best position to determine the near and intermediate business climate and they bring out the checkbook for only one reason, a strong belief that they may profit from a purchase.
When you look at countries whose economies depend on physical commodities, such as emerging markets, we find those valuations are roughly half those of the U.S. markets. Not coincidentally, we saw emerging markets turn positive last year as their currencies gained strength against the U.S. dollar. We believe that if global growth continues to gain steam this year, those markets may materially outperform the U.S. markets.
Let’s remember that there has been and continues to be a global synchronized monetary easing the likes of which we have never seen. In addition, there is a growing determination in global economies to add record fiscal stimulus (infrastructure spending) to this record monetary stimulus in an effort to achieve a breakout in economic growth. We have always subscribed to the tenet that investors should never fight monetary stimulus and that goes double for infrastructure spending.
In the end, our investment thesis for 2017 has not changed. We believe that all markets that ran hard will be due for a rest. U.S. markets have fairly fully priced in the growth, although energy and materials are still near the lower end of their long-term trading range (as well as emerging markets). We favor these sectors at this juncture as we see management soak up shares for themselves. Those willing to buy when it might be uncomfortable may reap rewards, in our opinion.
CRN: 2017-0501-5942 R
This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.