We blogged on this subject matter two weeks ago. We bought Dominion Resources and the XLU utility ETF. Utility stocks might be more than a defensive investment. Utility Stocks could be the new bluechips .
Our opinion: Dominion Resources, in particular, has rallied sharply. In the past, it’s one utility that has had a fair share of insider buying. The last significant purchase was back in September 13, 2019 when a director purchased 21,400 at $77.84. Insiders have been more recently selling stock in the first part of March at $85 and $87.50. Dominion closed at $73.51 Thursday. I wouldn’t rush in here, though. In fact we took some profits in Dominion and sold covered calls. D has rallied sharply. The first wave of the government stimulus response to the virus will provide support for bonds and consumer payments. What’s uncertain is what kind of moratorium towns and legislatures will put on utility payments if and when the Government dole runs out. If the virus and the mandatory shelter in places orders are protracted, then I would expect utility payments by consumers will also suffer. Businesses that are closed are already paying greatly reduced amounts. This will pressure the bottom line of all utilities. I wouldn’t expect dividends to be immune forever from the coronavirus. Not now, not in two months or three, but in time, pressure could mount to cut or even curtail dividends. Stocks will react far in advance. In fact they initially plunged until the forceful Federal Reserve response. In time they might be a sector that acts like blue chips where growth and gradually rising dividends is hard to come by.
This is from this week’s Barron’s:
The While regulated business is a negative factor in many sectors, for utilities it essentially means that government regulators will allow a reasonable return on utilities’ investments. For income-hungry investors, this brings some coveted certainty.
Source: For Dividend Safety, Try Regulated Utilities – Barron’s
As a rule, we only look at material amounts of money, $200 thousand or more, as anything less could just be window dressing. The bar is different from selling because the natural state of management is to be sellers. This is because most companies provide significant amounts of management compensation packages as stock. Therefore, with selling, we analyze for unusual patterns, such as insiders selling 25 percent or more of their holdings or multiple insiders selling near 52-week lows. Another red flag is large planned sale programs that start without warning. Unfortunately, the public information disclosure requirements about these programs referred to as Rule 10b5-1 is horrendously poor. I also generally ignore 10 percent shareholders as they tend to be OPM (other people’s money) and perhaps not the smart money we are trying to read the tea leaves on.
Of course insiders can also be wrong about their Company’s prospects. They can easily be wrong about how much others will value them, and in many cases, maybe most cases have no more idea what the future may hold than you or I. In short, you can lose money following them. We have and we curse aloud, what were they thinking! Needless to say, past good fortune is no guarantee of future success. We may own positions, long or short, in any of these names and are under no obligation to disclose that. We welcome your comments on our analysis.
This blog is solely for educational purposes and the author’s own amusement. Investing with The Insiders Fund is for qualified investors and by Prospectus only. Nothing herein should be construed otherwise. To learn more about our strategy, visit our website. If you would like to hear more about how you can get involved with the Insiders Fund, please schedule some time on my calendar.
Prosperous Trading,
Harvey Sax
