Corporate insiders signal trouble ahead for TSX energy sector

Share

Investor sentiment for Canadian oil and gas stocks is running the highest in years, with the S&P/TSX capped energy index at 52-week highs and up more than 22 per cent over the past 12 months.

But there's one group of investors less than enthusiastic about the energized sector right now: corporate insiders. And that's worth noting, given that officers and directors who execute trades in the companies they work for tend to be more right on their investment calls than the general population.

INK Research's sentiment indicator for the energy sector is sitting at 113 per cent. At that level, there is just a slightly higher number of stocks with key insider buying than selling over the past 60 days. That's down from 126 per cent when we last checked in on the indicator on March 24, and well below readings above 160 per cent at the start of this year. At 160 per cent, there would be 1.6 stocks with key insider buying for every one with selling.

Furthermore, total selling of energy stocks by insiders over the past 60 days reached a 52-week high of $343-million last week.

"Insiders continue to demonstrate particular restraint towards the Canadian energy sector," Ted Dixon, CEO of INK Research, said in a report today.

Clearly, some profit-taking is going on. Consider that the rally in the S&P/TSX capped energy index has even outperformed the tech-heavy PowerShares QQQ Trust ETF by almost 2 per cent in the past year. That ETF is filled with the high-flying momentum stocks that have gone in reverse over the last couple of weeks and led the broader-market declines.

"Investor spirits are being lifted by high oil prices which are up thanks in part to geopolitical factors," such as the political crisis in the Ukraine, Mr. Dixon said. "Insiders, however, seem quite prepared to take profits as the West Texas Intermediate price nears the $105 (U.S.) per barrel mark."

Mr. Dixon isn't suggesting Canadian oil and gas stocks are in a bubble. He thinks there remains some potentially attractive growth stocks in the oil and gas sector.

But risks appear to be rising.

"At this point, we suggest it is important to keep in mind that even if current high oil prices help to boost immediate cash flow at producers, the medium-term implications may not be so positive. Higher energy costs could end up dampening demand due to slower overall economic activity," he said.

Overall, Canadian insiders remain relatively downbeat for the Toronto market this spring - with the exception of the gold and real estate investment trust sectors. The INK sentiment indicator for TSX-listed stocks is currently at 98.1 per cent, just below the 100 per cent level that would indicate an equal number of stocks with insider buying and insider selling. A year ago, the indicator was at 150 per cent and had peaked well above 200 per cent in the early summer - where there were two stocks with insider buying for every one with selling.