Taking (premium) advantage of the dark arts
Corporate dark arts, part three
Imagine you had perfect access to a company’s financials, sales pipeline, internal emails, board discussions, and long-term strategy. Better yet, imagine everyone in the company would drop everything they were doing to instantly answer any question about the business you had. Heck, for good measure, imagine you controlled the company’s public communications, financial guidance, and investor messaging.
With that kind of edge, you could imagine that trading the company’s stock well would be pretty easy to do. You could buy the company’s stock any time it was too cheap…. and you could help make it too cheap by issuing pessimistic guidance or sounding down about the business. If you wanted to offload some shares, you could issue particularly bullish guidance and start selling.
Of course, what I’ve just described is the CEO of a company… and a long time ago regulators decided that they’d rather CEOs spend their time running businesses than swing trading the company’s stock all day, so insiders face a daunting set of rules and regulations that generally discourage them from day trading the company’s stock.
But there is a workaround of sorts for insiders: executives and boards often have enormous flexibility in how and when they issue stock-based compensation. If they want to get aggressive, they can use that flexibility to maximize the value of grants when the market price is badly disconnected from business reality (and perhaps make their own fortunes by using dour guidance to depress their share price in front of issuing the grant….).
My friend Mike (“Nongaap”) called this ability to create options after influencing the stock price “the corporate governance dark arts”. In volatile markets, those dark arts get even more valuable; volatility increases the value of any option, and insiders can see in real time how their business is doing and that any market driven puke in the stock is foolish and temporary.
I’ve already written two free articles on “dark arts” set ups (OPEN vs. RELY pay packages and the YOLO options at META), and I have several more posts planned for the next few weeks. However, every now and then I’ll build a “basket” of names that hit on a theme I like for the premium side, and there are 2-3 “dark arts” names that I find particularly edgy / actionable, so today I want to highlight one of those names to start the premium “dark arts” basket off: