Should folks pay closer attention to networking connections and insider selling at Freeport-McMoRan Copper & Gold (NYSE:FCX), McMoRan Exploration (NYSE:MMR) and Plains Exploration & Production Company (NYSE:PXP)? Perhaps they should. I like to look at ‘signals’ that are provided from insider transactions and networking relationships. I’m not claiming that anything here is illegal, but I strongly believe that people should pay closer attention to this stuff.
Let’s start with an article by Matthew Kanterman at Benzinga. He wrote the article, “Freeport Buying McMoRan Exploration and Plains Exploration: Too Close to Home”. In the article, he notes:
However, it is intriguing to note the overlap and intertwined relationships of the three companies' boards. In fact, there are 22 separate relationships between the boards of Plains and Freeport alone. As stated, the overlap of McMoRan and Freeport's boards is expected but this relationship raises questions as to the merits of the acquisitions. Nevertheless, there are 20 cases of board members from all three companies being intertwined through the boards.
One particular connection raised a few eyebrows at the University of Texas at Austin. According to Kanterman,
One case of overlaps that stands out actually brings into question the University of Texas at Austin. Charles Groat, Professor of Geosciences at the University, is an Independent Director of Plains Exploration. This is interesting because B. M. Rankin Jr., Vice Chairman of Freeport, is the Director of the McCombs Business School at none other than the University of Texas at Austin.
Courtesy of FactSet, here's the relationship at Texas that Kanterman noted:
In a statement by the University of Texas to Kanterman, they noted that Rankin was NOT a director:
The university accepted Dr. Groat's retirement last month. Additionally, Mr. Rankin not on faculty or staff at UT and there is no position of "Director" at the McCombs School. Mr. Rankin (along with Freeport's chairman James R. Moffett) is an alumnus and supporter of the McCombs school and has served on various UT advisory committees but is not a UT employee.
Richard Adkerson is the CEO of FCX. Although the University of Texas stated that Rankin was not a director, according to Adkerson's biography in FactSet, the CEO of FCX is a director:
He is on the Board of Directors at Freeport-McMoRan Copper & Gold, Inc., PT Freeport Indonesia, International Copper Association Ltd., The International Council on Mining & Metals, Business Council of New Orleans & the River Region, The New Orleans Police & Justice Foundation, Inc., New Orleans Baptist Theological Seminary Foundation, Greater Phoenix Leadership, Inc., Greater Phoenix Economic Council, Arizona Commerce Authority, and The University of Texas M.D. Anderson Cancer Center.
And, according to FactSet (link goes to MarketWatch at the WSJ, FactSet info), Rankin was a director as well:
Mr. B. M. Rankin, Jr., is a Director-McCombs School of Business at University of Texas, Vice Chairman at McMoRan Exploration Co., and Vice Chairman at Freeport-McMoRan Copper & Gold, Inc.
So, even if Rankin was not a director, Rankin and Adkerson still had strong connections to the University of Texas. Perhaps, Texas should contact FactSet and correct FactSet's database? The statement by Texas actually reinforced the idea that Rankin was well connected to the University. If Texas was trying to create some distance from the deal, their statement actually strengthened the connection. As a result of their ‘clarification’ and ‘defensive’ position, I had to look into the connections a bit more. In particular, I was curious to know how many connections existed between MMR and the University of Texas. According to Factset, it’s not just Rankin that is connected to the university; there are other connections as well. Needless to say, even though Rankin may not have the title of ‘Director’, there exist other strong connections between MMR, PXP, FCX and the University of Texas. Here's a sampling...
One of the most interesting connections occurs between FCX and PXP through James Flores and Richard Adkerson. James Flores is the CEO of PXP and the Director of MMR. Adkerson is the CEO of FCX and the Co-Chairman of MMR. Here’s a chart, courtesy of FactSet:
Note that FCX was going to buy MMR and PXP. Who would benefit from that transaction? Flores was at MMR and PXP. On Dec. 4th, PXP was trading at $36.05 and so Flores had $81.5 million in PXP. On Dec. 5th, the stock was trading at $44.50. His position in PXP increased by approximately $19-$20 million.
On Dec. 5th, MMR and PXP stock would rise, but FCX fell. In the connection that I listed above, Adkerson is the CEO at FCX and the Co-Chairman at MMR. Since FCX is the stock that fell, was there any prior insider selling by Adkerson? Yes. Now, to reiterate, I’m not claiming anything illegal. This is just a listing of the facts. Here’s a chart courtesy of FactSet. The red arrows show the insider selling of FCX by Adkerson.
How good was Adkerson at timing his FCX trades? Either through options or open market trades, he sold $33 million at an average stock price of $45.88. On the day after the announcement, FCX was trading at $32.16. If we were to presume that he sold the shares at $32.16 instead of $45.88, he would have sold them for $23 million. Adkerson’s timing was great – he made $10 million more by selling them earlier in the year.
There are times that we teach students how to value stocks and perform the ‘Porters Five Forces’ analysis on stocks. However, sometimes we need to pay closer attention not to SWOT analysis and discount rates, but to the network connections and insider trades that may provide valuable ‘signals’.
Note, for disclosure -- The University of Texas Investment Management Company does not hold MMR, PXP or FCX.
Note -- I was unable to get a comment from the student managed fund at the University of Texas. I'd like to know if they hold/held MMR, PXP or FCX. As a personal belief, to avoid even the remote appearance of any conflict of interest, MMR, PXP and FCX should be on the restricted of unavailable stocks to trade at the University of Texas.
Disclosure: Kanterman is long FCX and is related to an individual who works at a bank that advised on the deal.
Note, for disclosure -- the student managed fund at the Ross School of Business holds FCX.
Kai Petainen's views on the market and stocks are his alone, and do not reflect the views of the Ross School of Business, or the University of Michigan. Kai teaches a class on quant screening, F334 -- Applied Quant/Value Portfolio Management, at the Ross School of Business. Kai is a MFolio master at Marketocracy, and is featured in Matthew Schifrin’s book, "The Warren Buffetts Next Door".
