Swapped a 7.5% Yield for a 15.4% Yield

HESM: Sold (Exited 2.44% Allocation)

This Midstream company has been a solid performer. I still like the business, and the recent stock offering doesn’t bother me. The looming acquisition by Chevron could be good, or bad for HESM…most likely good, but we don’t yet know Chevron’s plans.

What bothers me is an unusually high level of insider selling recently. The chart below shows that share sales from HESM insiders have far exceeded purchases. In isolation, an insider sale isn’t necessarily a bad thing. People sell for many reasons, some of them personal, some of them related to the expected outlook for the stock.

Having said that, an unusually large amount of insider selling without justification does raise questions that I can’t answer. Individual stocks are generally riskier than diversified funds, because the risk is concentrated into one business. Therefore I’m more inclined to err on the side of caution, given that HESM is an individual stock.

A lot of my thinking on this situation was influenced by an analysis written by an oil and gas specialist on Seeking Alpha called “Long Player”. He has written extensively on the industry and his writing style appears balanced (ie without an agenda). Here’s a link to his most recent analysis of HESM and insider sales.

In summary, until we know more information, I think the downside of holding is potentially greater than the upside of holding. If the insider selling isn’t a signal of trouble ahead, and Chevron’s plans for HESM are good for shareholders, I can always buy back in later, though perhaps at a slightly higher price.

Last of all, HESM has appreciated more than I expected. Since I started buying it at the end of 2023, it has returned just over 17%, including distributions. The yield is currently below 8%, but growing. I hope the smoke clears and I can buy back in, because it has an outstanding distribution history.

EIC: Bought (2.44% Allocation)

With a yield of over 15%, this one comes with risk, but I don’t plan to allocate much more than this initial purchase; probably capping the allocation at 3%.

I’ve purchased funds with an allocation to Collateralized Loan Obligations (CLO’s) before, but this is the first fund I’ve purchased with that specific focus. In simple terms, CLO’s are a huge basket of business loans. The basic concepts are explained in this recent review of EIC. 

If you’d like a deeper dive into CLO’s, I suggest this hour long interview (not my channel) with Tom Majewski, the Founder and Managing Partner of Eagle Point Credit (they manage EIC).