In the Florida Republic, we have ten laws - not rules, but laws - that all should follow.
No. 4 is “Qualify Everything.”
If something seems too good to be true… it is.
If someone offers you something, gather all information necessary to make an informed decision on whether you will accept…
And if an investment opportunity arrives – regardless of how cheap or strong it looks – you need to ask yourself one question.
Why is this opportunity presenting itself?
A perfect example is an energy company called HighPeak Energy (HPK).
On the surface, the stock looks relatively cheap.
One of the most important "buy" signals for any stock went "green" on Friday for High Peak.
And, Friday, HPK shares popped 6.2% after trading closed…
For all the wrong reasons.
Follow The Insiders
Here in the Republic, we closely monitor one group of people. We watch them like you might watch flamingos – slowly walking around and usually not doing much.
But when something happens – a flamingo swings its head at another bird, or it flaps its wings widely, and suddenly… everyone goes "Ohhhhhhhhhh!"
The same goes for corporate insiders in the executive suite.
One of the most important buy signals for stocks typically comes when we see CEOs, CFOs, and other corporate insiders, like board members, COOs, and 10% owners, scoop up the stock.
This is the subject of one of this century's most important financial academic papers called "Do Insiders Exploit Anomalies?" Of every market anomaly, insider buying shows the most significant statistical edge in the markets.
On Friday, we saw a wave of insider buying at HighPeak.
Count them: Eight insider buy transactions happened on July 19.
You’d want to be buying alongside these insiders, too.
Not so fast…
When You Qualify It, Things Look Different
This is a buy that I’m willing to sit out for right now. Aside from the fact that an AI bot likely wrote this insider analysis, this isn’t the type of insider buy that inspires me.
It turns out that this insider buying coincides with a public offering of 14,835,000 shares of its common stock. The deal was an equity offering at $10.50 per share.
The company got about $150 million in cash proceeds as it is trying to address its current financial conditions.
Truist released a report on this offering on Tuesday. It shores that the company needed about $135 million in new cash to avoid a default on debt through September 30.
“We would expect HighPeak to continue to pursue both equity and debt solutions with the most recent offering opening up the company’s ability to fully draw down its revolver to meet certain near-term obligations,” Truist’s analyst Neal Dingmann wrote. “ We are raising our price target to $8 from $6 as the offering reduces our interest expense estimates.”
That seems right. A price target below the current share price.
Looking at HPK, the stock has a Piotroski Score of 5 – and it’s likely going to fall, as I’m not sure that it will increase its return on assets in the year ahead.
The tangible book value of the company is $10.79.
Dingmann is one of the best energy analysts on Wall Street.
He’s been bullish on three of the other names that we’ve been buying: Earthstone Energy (ESTE), Occidental Petroleum (OXY), and Ovintiv (OVV).
And here you have a stock that trades at $13.00 and which popped after the bell with a new price target of just $8.00.
I have a price target on HPK of $9.50, well below the $30.00 that shares hit on January 25.
Bottom line: Sit this one out… and look elsewhere in the insider universe for energy stocks. Ideas for put spread sellers include Oneok (OKE), Epsilon (EPSN), and of course, Occidental (OXY).
Drink of the Weekend
The “Long Drink”
A Finnish tradition, this crisp summer drink is great for the knees and morale.
Drink Instructions
- Drive 2016 Honda HR-V to grocery store.
- Exit vehicle as 78-year-old woman complains about heat.
- Visit Aisle 2 and look for a Blue 8-pack of Long Drink stuffed in the top corner of the White Claw cooler
- Curse “inflation” and Jerome Powell, while paying $18.68.
- Drink two cans in the garage and bring rest inside before family interactions.
- Convince everyone Long Drink is only sold in six packs as you place remaining cans in the fridge.
- Enjoy your evening.
Stay alert,
Garrett Baldwin
Florida Republic Capital
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.