Hedging Their Bets

These two examples of well-known companies show how share prices often drop after top managers hedge. But the details surrounding each hedge can be complicated and hard to interpret

Pulte Homes

After a several-year slide, shares of the home builder nearly doubled in early 2008, to around 16. On Feb. 26, founder and Chairman William Pulte hedged 3.35 million shares in exchange for $33 million in cash. Losses for that quarter swelled to $2.75 a share, three times what analysts expected; within months, the stock was again below 9. Pulte missed earnings three out of four quarters that year. Two later hedges have yielded Pulte another $85 million. Pulte, who is retiring from the board at the end of March, says the transactions were driven entirely by his personal situation, as part of his ongoing estate planning and to fund charities.

Boston Scientific

Starting on Sept. 9, 2008, with shares trading at $12.40, director and co-founder Peter Nicholas entered the first of numerous hedges that occurred through the yearend and in much of 2009. Within a month, shares plunged as supplies of a new stent fell short, the company lost a legal battle with Johnson & Johnson, and earnings fell below expectations. He and co-founder John Abele were forced into large stock sales to meet margin calls. Abele, too, has since hedged extensively. The shares now stand at $7.80. Nicholas says he has used hedges for seven years to diversify his portfolio and generate cash, and does so rather than sell outright because he remains a strong believer in the company. Abele said his hedges generated needed liquidity to maintain his philanthropic and other commitments after the margin calls; he also believed the company would do better. Both say many of their hedges were executed over numerous months through prearranged trading plans known as 10b5-1 plans, designed to allow executives to schedule trades when they are not in possession of material inside information.

Data: Company filings, Gradient Analytics, Verus Research, Bloomberg

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