Why Are Executives Short Whiskey?
Who doesn't enjoy a glass of whiskey once in a while? Apparently, whiskey manufacturers may be less positive about the beverage than many of us may think. Using publicly available data, investors may get a sneak peek of how the alcohol production industry as well as others may be heading in 2012.
In comes insider trading. In some cases, it is illegal and ruins the fidelity of the capital markets. In other cases, it is perfectly acceptable and could help guide investors. While insider buying and selling is a standard procedure of any company, can independent investors benefit from the information?
Insider trading activity can help traders infer how executives view their own companies. Understanding insiders' flow of wealth allows traders to take away key observations from legal insider trading in order to modify their own trading strategies.
Brown-Forman (NYSE: BF.B) is a large manufacturer with a market capitalization of about $11.25 billion. The firm produces and distributes alcoholic beverages including Jack Daniel's Whiskey, Southern Comfort, Finlandia Vodka, and other spirits. These products are known to most Americans and have been highly profitable for the company.
In the past week, Brown-Forman experienced a large block trade by one of its executives. The executive sold about 54,000 shares, which represents about 0.01% of all outstanding shares. Moreover, the total market value of shares sold is about $4.3 million, which were sold at an average price of $79.06. While the trade may not look very significant to the average investor, it still represents an executive's standpoint on the stock price.
While the executive may not believe that the company is going to fail or underperform in the near future, he may believe that the stock price is higher than expected for the company. On the other hand, the executive may not have any negative beliefs about the company or its stock price, and may have simply sold some of his holdings in order to free up liquidity for personal use.
The worst case scenario is that the executive may believe that the company's operations are trending negatively. While this is always possible, it seems likely that more executives would have started selling their own holdings if the company were in trouble. Keeping that in mind, investors should monitor Brown-Forman's insider trading patterns over the coming weeks. Perhaps the current executive believed that the company will not meet earnings estimates or will not expand its distribution efforts, but it is too early to tell what may be going on with the company.
VMware (NYSE: VMW) is a large company in the information technology space that specializes in virtualization technologies and offers cloud computing capabilities. With a market capitalization of about $37.1 billion, VMware inherently experiences large volumes of trading every time it makes a significant move upwards or downwards.
In the last week, one executive purchased approximately 240,000 shares at an average price of $82.92. Although VMware currently has around 422 million shares traded in the public equity market, the executives block trade represented about 0.2% of total shares outstanding, which is a significant accrual for a single shareholder. Totally, the purchase's market value is nearly $20 million.
The executive's decision to purchase one large block trade in the last week may be a bullish sign for VMware. Although it is unknown if this is the only recent block trade made by this particular executive, one can infer that his sentiments are extremely positive about his firm. Although executives are not allowed to purchase or sell shares immediately before important announcements, retail investors may be able to imply that big, important news is inevitable for VMware.
Perhaps the company has garnered new contracts or has generated positive earnings; only the executive knows, but his actions may give retail traders a sneak peek into the company's near future. Since his block trade, the company's stock price has appreciated by about $5. Based on the stock's history, if the company announces bullish news, the stock may run up a few more dollars and may result in a 10% gain since the time of the block trade.
How Can These Executives Help You?
By understanding insider buying and selling trends, traders may be able to figure out what executives think of their own companies. These types of trades tend to be medium-term investments, meaning that a trader will have to hold securities for a few weeks to a few months before realizing its full potential. Also, considering that insider selling could just mean that someone is trying to free up cash, these insider transactions may not mean much.
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Traders who believe that these companies will outperform in the future might want to consider the following trades:
- Long VMware by buying shares or buying call options. If you go with the options strategy, you could purchase a straddle just to reduce risk associated with the bet.
- Carefully purchase Brown-Forman, with a hedge in place in order to prevent adverse price action.
Traders who believe that these companies will underperform may consider the following positions:
- Safe strategies with BF.B is probably the best idea. Pursue non-directional options strategies on Brown-Forman. Investors could use long-term straddles for this purpose.
- Short an ETF that tracks cloud computing companies, such as the First Trade ISE Cloud Computing Index (NASDAQ: SKYY), as the insider trading in VMware may signal sentiments regarding macroeconomic conditions.
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