Workers tap deep into North Dakotas Bakken formation, on a Precision Drilling rig.Nathan VanderKlippe/The Globe and Mail
Executives in the energy sector are losing their appetite for buying shares in their own companies as the fiscal uncertainties swirl in Washington.
INK Research's energy sentiment indicator today is at 147 per cent. That means there are just under 1.5 TSX energy stocks with key insider buying for every one with selling over the past 60 days.
It's now in a clear descent. Last week, the indicator was at 179 per cent and a month ago it was near 200 per cent – where there were two stocks with insider buying for every one with selling.
Energy depends on strong economies to drive consumption growth, and the impasse among the U.S. political parties over the budget that has furloughed thousands of government workers has already prompted some economists to cut their economic growth projections for this year. Meanwhile, the lack of any substantive negotiations over raising the nation's borrowing limit points to the possibility of much more serious damage ahead to the macroeconomic picture.
"While we have characterized Canadian insiders as taking a "wait and see" attitude towards stocks, energy sector executives do not fit that generalization," commented Ted Dixon, CEO of INK Research, in a research note. "Should the U.S. fall into a recession on the back of a missed debt ceiling extension, oil prices and related stocks could take a big hit," he added.
Similar to the analyst community, INK Research rates sectors, but does so based on what corporate insiders are doing. Today, he downgraded the energy sector to "overvalued" based on the declining interest among insiders.
"While there continues to be value opportunities at the stock level, investors may want to consider a defensive posture or hedging at least until the dust settles in Washington," he advised.
For the market as a whole, INK's TSX sentiment indicator suggests insider buying interest has levelled off over the past month. It's now at about 110 per cent, compared with about 117 per cent a month ago.
"With insider buying now in a holding pattern, we have the Toronto market on watch for a possible downgrade to fair-valued," commented Mr. Dixon.
"Executives are clearly hesitating even as share prices come off their September highs. Current valuations may be too rich in light of the risks coming out of Washington," he said.
Darcy Keith