MEMC Insider Buying Versus Active Put Options (WFR)

Investors would much rather see insiders of companies buying up stock rather than selling it.  That is particularly true in a stocks like MEMC Electronic Materials Inc. (NYSE: WFR) where the situation has been full of pain with losses from peak to trough having been about 90%.  So far in August, there has been more than $1 million in share purchases from insiders for MEMC shares.  The problem is that trading in put options has been elevated, a sign that bets are being made against this or that holders are at least hedging their long positions.

The insiders buying shares bought at low prices that were under $10.00. That does not just mark purchases made close to 52-week lows.  Those were close to the lowest prices since before 2005.

Last week it was President and CEO Ahmad Chatila who purchased more than 50,000 shares 51,227 shares at $9.76 on average, while the semiconductor materials head Chandrasekhar Sadasivam bought some 50,000 shares at $9.91 on average.  A Vice President bought 2,000 shares at $9.80 and MEMC’s CFO bought 8,000 shares at $9.52.  All said and done, the purchases were more than $1 million.

This comes at a time when its late-July earnings release discussed some obvious margin compression in its guidance. MEMC said that it now expects to exceed its earlier revenue guidance of $1.75 billion to $1.85 billion, but it sees earnings below its previous guidance of $0.70 to $0.80 EPS.  What is interesting is that the last revenue figure was up over 50%, not bad for a company that makes wafers and materials used to manufacture solar panels and memory chips.  There is just no earnings guidance, and that brings some continued cause for concern that earnings will be softer or even that losses will return.

The put option trading this week flies right in the face of the insider buying in the company stock. With a weakening of Intel expectations from analysts and with solar players still facing tougher markets in 2011 and 2012, maybe this is to be expected.  SmarTrend noted that put options volume was over 31,000 contracts on Tuesday, about 9-times normal options volume.  We looked at this today for Thursday, and the trading in put options remains elevated with more than 9,000 puts traded so far today.  Today’s activity was out to JAN-2011 in the Puts.  That means there is likely new and active trading rather than just a rolling of options out before options expiration date.  Here is the activity in the January-2011 Puts by strike price:

JAN-P$   Volume    Op.Int.
$9.00     1,984    10,141
$10.00    1,533    12,132
$11.00    2,915    9,924
$12.00    1,150    21,386

When you consider how much softness there has been from Intel and Cisco coupled with an already-weak stock market, you might expect more weakness in a name that has been weak for a long time.  So why is the stock up 4% so far this week?  The stock is only down about 2% from the highest closing price this week.  Not bad for a weak stock that is in two weak sectors at the same time.

MEMC is a company where many have hoped that a buyout would come its way.  The company would probably have a very hard time even accepting a buyout because of its share price having been exponentially higher before.  Still, insider buying is often thought of by investors as a prelude ahead of a deal of some sort, a large contract, a general improvement in business conditions, or another shareholder-friendly event.

JON C. OGG