{"id":28299,"date":"2012-03-16T10:42:15","date_gmt":"2012-03-16T14:42:15","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2012\/03\/16\/insider-edge-in-practice-lorillard\/"},"modified":"2012-03-16T10:42:15","modified_gmt":"2012-03-16T14:42:15","slug":"insider-edge-in-practice-lorillard","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2012\/03\/16\/insider-edge-in-practice-lorillard\/","title":{"rendered":"Insider Edge in Practice: Lorillard"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

\"\"<\/a>The best way to explain how to use the trading moves of company insiders is with an example.\u00a0 In the spring of 2011, the shares of tobacco giant Lorillard, Inc. (NYSE: $<\/span>LO<\/a>)<\/strong> caught my attention.<\/p>\n

Lorillard is the third largest manufacturer of cigarettes in the United States and the oldest continuously operating tobacco company. Newport, Lorillard’s premium menthol-flavored cigarette brand, is the top-selling menthol and second-largest-selling cigarette in the United States.<\/p>\n

I\u2019ve made the case for \u201cVice Investing\u201d<\/strong> repeatedly in the Sizemore Investment Letter<\/em><\/strong><\/a>, and I\u2019ve given special attention to the tobacco industry.\u00a0 \u00a0To briefly summarize, tobacco companies are uniquely attractive investment for a number of reasons:<\/p>\n

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  1. Government regulation and the threat of lawsuits prevent new competitors from entering the industry.<\/li>\n
  2. Many institutional investors with \u201csocially responsible\u201d mandates are not permitted to invest in tobacco.\u00a0 This lack of institutional buying has the effect of lowering the valuation, thus making tobacco stocks perpetual value stocks. (For a detailed explanation of this phenomenon, see \u201cThe Price of Sin<\/a>\u201d)<\/li>\n
  3. <\/strong>Tobacco companies generally pay very<\/em> large and growing dividends.\u00a0\u00a0 The reinvestment of dividends is the single most powerful wealth compounding tool available to investors.<\/strong><\/li>\n<\/ol>\n

    While Lorillard enjoys all of these benefits, in April of last year it also has the bonus of trading at a significant discount to its peers.\u00a0 It has the lowest P\/E and the highest dividend yield of major tobacco companies\u2014a whopping 6.7%.<\/p>\n

    Lorillard\u2019s depressed price was mostly due to fears that the Food and Drug Administration would make the company\u2019s primary product\u2014menthol cigarettes\u2014illegal.\u00a0 The FDA decided against such a move earlier in the month, yet the share price still reflected investor fears that bad regulatory news would be coming down the pipeline.<\/p>\n

    There was one person, however, who was conspicuously confident.\u00a0 The company\u2019s CEO Murray Kessler spent nearly a million dollars of his own money three months before buying shares of Lorillard on the open market.<\/p>\n

    Corporate insiders sell stock for any number of reasons.\u00a0 They exercise stock options and liquidate the shares.\u00a0 They sell off shares of their concentrated positions in order to diversify their portfolios.\u00a0 They unload a few shares to buy a nice vacation home in the Hamptons.\u00a0 There are infinite reasons why an insider might sell the shares of the company they help to manage.\u00a0 But there is only one<\/em> reason why they would buy.<\/strong><\/p>\n

    When you see the man who runs the company putting his own money behind it, you can be reasonably certain that good news will be forthcoming.\u00a0 While it is illegal for corporate insiders to trade on material non-public information, there is nothing at all illegal about them using their intimate knowledge of the company and industry to handicap the odds of, say, an FDA decision and trade accordingly.\u00a0 I\u2019ll trust the judgment of an informed insider over the uninformed masses.<\/p>\n

    In Lorillard I saw the conditions for the perfect trade lining up.\u00a0 In Lorillard, we had:<\/p>\n