Diageo's Chairman Just Spent $1.2 Billion on Its Stock. Should You Buy, Too?

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Investing legend Peter Lynch once noted that executives can sell company stock for many reasons, but they typically buy it for only one: They think it is going up. Although there are a bunch of caveats to that truism, it is seen as a bullish signal.

Since the chairman of Diageo (NYSE: DEO) plunked down almost $1.3 million to buy the distiller's stock the other day, perhaps investors should take a look at whether they should follow his lead and buy in themselves.

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Swinging for the fences

Chairman Javier Ferran has a history of buying big tranches of Diageo stock, purchasing tens of thousands of shares at a time. Because he came to the distiller with a distinguished pedigree in the spirits business, one can assume he has an intimate knowledge of he business toggle him insight.

Prior to becoming chairman of Diageo's board in January 2017, he served as managing director of vermouth maker Martini & Rossi, president and CEO of rum giant Bacardi, and also serving as a non-executive director at SABMiller before it was acquired by Anheuser-Busch InBev.

His stock purchases are made on London's FTSE exchange, so they're not completely analogous to how Diageo's U.S.-listed shares would perform, but below are the returns he would have generated based on the distiller's stock price on the NYSE.

Date of Purchase

No. of Shares

Stock Price at Purchase

Approx. Amount Spent

Gain/(Loss)

October 4, 2016

18,500

$116.33

$0.52 million

21.3%

November 15, 2016

13,000

$100.97

$0.32 million

39.7%

August 15, 2017

65,000

$131.36

$2.07 million

7.4%

January 26, 2018

30,000

$145.02

$0.97 million

(2.7%)

October 12, 2018

30,000

$133.76

$0.97 million

5.5%

December 19, 2018

35,000

$140.71

$1.24 million

0.3%

It's clear that Ferran has not been shy when betting on Diageo's future, and there are a number of other, smaller share amounts he's purchased along the way, too. These are just his biggest bets.

A premium point of view

Shares of Diageo are down almost 5% year to date, which would make Ferran's purchase timely, but simply because a stock is down doesn't make it a buy. The distiller's attempt to dominate the premium and above spirits category, though, just might.

Diageo owns the world's biggest scotch whiskey in Johnnie Walker, from which it makes most of its $16 billion in total annual sales, but it has recently heavily invested in tequila, including its purchase of actor George Clooney's Casamigos brand, as well as a number of premium vodka labels such as Ciroc and Smirnoff.

While vodka has been a weak category for the distiller, whiskey has never been more popular, and with its offshoot Jane Walker brand, Diageo is attempting to take a leadership position in the growing women demographic.

Diageo also just finished selling off its value brand of spirits to Sazerac, which may be best known for its cinnamon-flavored whiskey Fireball, but the divestiture gives Diageo greater focus on its top-shelf portfolio. Nielsen data shows that high-end spirits now account for 55% of total industry spirits volume and 62% of dollar sales, but it is the ultra-premium spirits segment that is growing the fastest.

Considering how the distiller is positioning itself in this lucrative market, and that its chairman is making another big buy bet on the company's stock, it might not be the worst investment to buy your own stake in Diageo.

Key investment takeaway

Insiders aren't always right on the direction their company's stock will take, but when one with specialized knowledge of his industry who has a pretty good track record of choosing his entry points drops over $1 million on its shares, it's definitely a noodle point that investors should consider.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool recommends Anheuser-Busch InBev NV and Diageo. The Motley Fool has a disclosure policy.