Rule #1 Finance Blog

With Investor Phil Town

Rule #1 Question of the Week: Tech Businesses and Stock Options (WDC)

Phil_town_140 This week's Question of the Week for Phil Town:

Q:

Hello Phil Town,

I'm a reader of your book from Kuwait. I'm a complete novice in the stock market, I'm trying to learn while reading your book. I never seriously considered the stock market until I read your book, thank you.

I was checking out Western Digital (WDC) on MSN money and I was amazed by what I saw in the insider trading page. Is this really a good example of suspicious selling or is this normal?

What is the time frame that we should use when calculating the
percentage of stocks sold by the company directors? I mean old sales
don't count right? But how old?

A:

Hi Ahmad,

When I see you guys digging into tech companies my first question for
all of you is:  do you really truly understand this business? 

The second question is, do you really believe that it has a big enough
MOAT to make it certain that it will be around in ten years?  Once you
get those two right, the rest is pretty easy.

So assuming you are a hard drive guy and know your stuff and you like
WDC (although it appears on a quick glance that it's at Sticker, though
I'm just going off of default numbers that could be way too low), all
this insider selling might be a big to-do about nothing. 

Tech biz plays with stock options a lot.  It looks like these guys had
options at $13, exercised them (perhaps before they were to expire) and
sold at $20.  And it drove the stock down to $17.  I'd just call them
and hear the corporate line but it could be innocent.

Now go play.

Phil Town

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Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.