Those who know it best…

There was a time when I was a big commodity bull.

Now just to clarify, I am still somewhat of a commodity bull. I like some oil stocks, I like a gold stock or two, I think natural gas is going to surprise to the upside and I’m looking at the lumber stocks.  But there was a time, back in 2004 and 2005 and even 2006 when I was a real China growth story commodity bull.  I was all about copper and zinc and nickel and demand for those metals from China.

Well that was another time but there are lessons to be learned.  Here is an anecdote that has relevance today.  Around the end of 2004 I was trying to figure out if I should get into Aur Resources. Aur was a Canadian stock mined copper in Chile.  I  remember it was around this time of year that I was looking at the stock, and it had just moved higher yet again.  So I liked what I saw about the company, and I really liked the idea that we were near the beginning of a super-cycle in the base metals, but there was this problem – the stocks had jumped significantly.  Aur Resources was a $2 stock that had quickly become a $6 stock in the past year.

And what’s more, the insiders were selling.

I remember this, because at the time I was pretty new to investing and from what I had read insider selling was a really bad red flag.  If the insiders didn’t want the stock, and I mean they knew everything there was to know right, there must be a disaster around the corner.

I don’t have all the statistics from 2004, but here is a list of insider sales I dug up from January 2005, available from the Northern Miner.  Take a look; its mining company after mining company, some of them with directors and executives selling hundreds of thousands or millions of dollars worth of shares.  It was a rush to the exit.  There is Aur Resources, along with other names like Inmet Mining, Teck Cominco, Inco and so on, all with big sales.

Well its fortunate that at that time, while perhaps not with the personal experience to dissect the situation, I did have an excellent guide.  I listened to Donald Coxe regularly, and Coxe, who also saw that the commodity super cycle was in its nascent, knew exactly what was happening.  And Coxe summed it up with this phrase:

“The most exciting returns are to be had from an asset class where those who know it best, love it least, because they have been hurt the most.”
— Don Coxe’s definition of a bull market

It could not be more clear.

The reason that the insiders of Aur Resources and Inmet Mining and all the other mining companies were selling had absolutely nothing to do with the future of the business.  In fact, the future of the business would never be brighter.  If you go through that Northern Miner list you will find it full of stocks that trades two, three or even four times higher over the ensuing few years.

No the reason that the insiders were selling was because they were beaten down.   These executives, fighting to survive year after year, always a bad quarter or a recession away from bankruptcy, every hint of optimism squashed, well when they were given a light in their dark tunnel  they headed straight to the exit.

How this played out is history.  I would go on to buy Aur Resources at $6 and sell it at $30.  I would go on to buy other mining outfits like Teck Cominco and Hudbay Minerals for equally large gains.  Never once did I worry about the insider selling in the names.  I owe those profits to Donald Coxe.

Why is this relevant?  Because I have been asked by a couple people now to comment on the insider sales at Impac Mortgage.  I wrote an article on Seeking Alpha last weekend about the bull case for the company, and since that time there have been three more Form 4 filings for the company.  So while I could argue that the CEO and President still own a significant amount of shares, or that the sales have only been partial one’s and that some of those proceeds are to pay the taxes and the strike price, the truth is that the selling should not be much of a surprise.   The options the directors are exercising, like the options of the executives at Aur and Inmet and Teck were at the time, are rather ridiculously in the money by between 5 and 20 times the strike.  The stock, just as was the case with the base metal miners, has been mired at low single digits, priced for bankruptcy, for years.  These guys have been waiting for this pop for years.

Now its always possible there is something on the horizon that I don’t know about.  But I doubt it.  I think its far more likely that these guys, who undoubtedly have sat through board meetings contemplating the bankruptcy of the company, who have seen the company in which they oversee fall from almost $300 per share to less than a dollar, and who have probably been on the receiving end of phone calls and meetings from irate shareholders calling for their heads, have just said you know what, my pay day is here, give me the money and let me enjoy the holidays.

Good on them for it.  And good on the executives of Aur and Teck and Inmet.  They did well with their sales.   Sure they could have held them and sold for them for much more, but they made their pay, and they made good money for their shareholders.  After all, that is their job..   As it is with Impac, the job here is to run the company, not trade the stock.