Brown Forman’s Chief Production Officer Bought The Stock

According to a filing with the SEC, Jill Jones of Brown-Forman Corporation (NYSE:BF.B) purchased about 2,100 shares on January 15^th at an average price of $63.44 per share. Between her holdings of Class B and the less liquid Class A shares, she now owns over 12,000 shares directly and a smaller number of indirectly held shares. Jones is an executive vice president at Brown-Forman, and serves as chief production officer for the beverage company (which owns, among other brands, Jack Daniels and Southern Comfort). Our database of insider trading filings shows that two Board members had bought the stock at similar prices in September and August 2012. See a history of insider purchases at Brown-Forman.

Studies show that stocks bought by insiders tend to go on to outperform the S&P 500 (read our summary of studies on insider trading), and we think that this is because of what insider purchases signal when considering the benefits of diversification. Insiders should avoid buying more of the stock as their future income is already tied to the company’s prospects, and so they should diversify their investments- unless they are confident that the stock price will rise. Insider purchases reveal this confidence (though, of course, the insiders aren’t always right).

Brown-Forman Corporation’s most recent fiscal quarter ended in October, with the company reporting a 10% increase in net income off of essentially flat revenue. It’s good to see higher margins, but we would worry that earnings growth would not be sustainable unless there is improvement on the top line as well. In addition, the stock trades at 25 times trailing earnings and even with moderate growth expectations from the sell-side the forward P/E (for the fiscal year ending April 2014) is 22. We wonder if Brown-Forman might actually be overvalued; the combination of poor sales growth and a high earnings multiple certainly doesn’t make it look like that sensible a buy.

Hedge funds had been quite cool on Brown-Forman Corporation in the summer of 2012, but we did catch some funds moving into the stock in the third quarter. Billionaires Richard Chilton and Ken Griffin had their funds approximately double their stake in the company; at the end of September, Chilton Investment Company owned about 640,000 shares while Griffin’s Citadel Investment Group had about 400,000 shares. Find more stock picks from Richard Chilton and from Ken Griffin. Gardner Russo & Gardner- a fund which had a number of alcohol related stocks among its top holdings- increased the size of its position in Brown-Forman by 50% to a total of 2.8 million shares (check out Gardner Russo & Gardner’s favorite stocks).

How does Brown-Forman stack up against its peers?