The question of Congressional insider trading has proven to be one of the rare subjects in U.S. politics that managed to garner almost unanimous support for either limiting or outright denying the ability of U.S. policymakers to participate in stock market trading. With the nature of their public service making them privy to information prior to it becoming available to the public, sometimes even weeks or months before, they enjoy a clearly unfair advantage that allows them to generate returns that far outpace the average stock market investor.
The Speaker of the U.S. House of Representatives has been one of the most active investors on the Congress floor, attracting much controversy in the process. When it comes to discussing the controversies surrounding the question of Congressional insider trading, it becomes almost impossible to glance over the subject of Nancy Pelosi and her trading record.
With the passage of the 2012 STOCK Act, policymakers are now required to make their trading activity publicly available, which allowed us to collect and store years of Congressional trading data. Henceforth, in our today's article, we will explain how we have leveraged the data we have collected on the trading activity of the current House Speaker, to design a unique trading strategy that emulates her trading activity, allowing the average investor to attempt to replicate at least a part of the trading success that the Pelosi family has been able to enjoy for decades.
The average American was not always privy to information on what exact stocks his public representatives were involved in trading and if they were possibly making money while doing so. However, a recently growing outcry for more transparency resulted in a minor win for the average investor that came in the form of the 2012 STOCK Act. In its current form, the bill requires members of Congress to publicly file and disclose their stock trading transactions within 45 days of the transaction date.
However, while it represents a significant step forward in terms of enabling more transparency, this has not kept policymakers from generating above-market returns, far beyond the average stock market investor. There is hardly a better example of the edge the average policymaker can have than the current trading record of the Speaker of the House of Representatives, Nancy Pelosi. Throughout the years, Rep. Pelosi has managed to attract much controversy when it comes to Congressional insider trading, with many of her stock trades being notoriously well-timed. It is worth noting at this point that House Speaker Pelosi does most of her trading through her husband, Paul Pelosi, who owns and operates a successful San Francisco-based investment company. Here are the latest Pelosi stock picks that are worth considering:
This U.S. technology company has managed to attract significant attention from congressional insiders this year, with multiple policymakers adding the tech company to their portfolios. Still, the purchase that managed to attract the most controversy in the last couple of months was the one made by House Speaker Nancy Pelosi.
The House Speaker was on the receiving end of criticism for a long time already due to her husband's very unusual and controversial stock trading style. However, things took a turn for the worse on June 17th, when Paul Pelosi exercised options he had acquired a year earlier in order to purchase 20,000 shares of Nvidia stock at a price of $100 per share. Shares of the company traded at between $160 and $169 in the following days after the calls were exercised. That is slightly more than $1 million in gains, minus the options premium.
To make matters slightly worse for the Pelosi family, most of their Nvidia purchases occurred in the weeks and months before Senate was intended to vote on the CHIPS act, which was formed with the aim of supporting the United States semiconductor industry by providing billions of dollars in subsidies and tax credits. Much of the $52 billion bill is planned to go to chip manufacturers in order to incentivize the establishment of domestic manufacturing, in an overall effort to limit the US dependence on Asian imports.
The rather ironic part is that many of the benefits the bill stands to introduce would in fact mostly go in favor of companies like Intel (INTC) or Micron (MU), who design and manufacture their own chips. In its current form, the CHIPS act largely favors chip manufacturers and stands only to indirectly benefit companies like Nvidia or AMD (AMD). However, there is a separate version of the FABS Act introduced in the U.S. House of Representatives that contains both the manufacturing tax credit and a tax credit for chip design activities that would directly benefit them. After widespread criticism for Pelosi's Nvidia play, the position was recently closed out (at a minor loss). The sheer volume of public pressure that was mounted due to this controversial trade can be seen in the fact that it got disclosed immediately, unlike most of her trades, for which the public usually tends to wait 20-30 days.
While the controversy surrounding the rather timely purchase of Nvidia stock seems to be taking most of the media headlines these days, there are other interesting trades that the Pelosi family has made this year. On the 21st of June of this year, the Pelosi family sold 10.000 shares of Visa, a payments technology company that traded at around $194 per share at the time of the transaction.
Visa has been one of the long-term holdings of the Pelosi family, and them deciding to let go of the investment would not necessarily by itself represent big news. But once again, it is the timing of this sale has raised suspicions and managed to garner criticism. Only days ago, news broke that two U.S. senators, Sen. Dick Durbin and Sen. Roger Marshall, are expected to introduce a bipartisan bill next week that is supposed to take aim at the dominance of Visa and Mastercard (MA) among U.S. credit-card networks.
The bill aims to create more competition in the space by allowing merchants to steer credit card transactions through 3rd party networks, thereby not necessarily using the services of the credit card brand issuer. The bill aims at a key revenue source for both companies and is similar in nature to the debit-card rule Sen. Durbin had backed more than a decade ago, which ultimately came through as a part of the 2010 Dodd-Frank Act. The move came after years of merchants complaints that the existing system, where the two companies independently set credit card interchange rates, was highly anti-competitive and among the highest in the world.
Another long-term holding of the Pelosi spouses has been their investment in the US telecom company AT&T (T). In an effort to fully focus on their legacy business and attempt to combat the increasing debt issue that the company had to face, the telecom decided to spin off its WarnerMedia assets last year, reaching a deal with Discovery Communications, a media empire lead by David Zaclav. The joint assets of the two companies would go on and form Warner Bros Discovery, a new integrated media, and entertainment company set to swing for the big players like Disney (DIS) or Netflix (NFLX).
As a result of the merger, AT&T ended up distributing 0.24 shares of WBD for each share of AT&T owned by their shareholders. While Pelosi family has not purchased the company directly, it is clear at this point that the spouses decided to hold on to their distributed shares, unlike many other AT&T shareholders. After the finalization of the historic deal, Warner Bros Discovery has had a very rough couple of months on the trading floor, generating a negative year-to-date return of 40.19%, with shares of the media and streaming giant currently trading around $13 per share.
The maker of the iPhone has been one of the most often traded companies when it comes to the Pelosi family, with six disclosed trades in the last twelve months alone. The trading dealt almost exclusively in call options, apart from one occasion last December when the family donated two batches of 3,000 shares to Trinity College and Georgetown University. Interestingly enough, the latter half went to an Endowment Fund in Paul Pelosi's own name, with the total donation valued at slightly more than a million dollars.
The rest of the trading was more profit-oriented. On two different occasions in May of this year, the Pelosi family purchased two batches of a total of 200 Apple call options expiring at the end of the first and second quarters of next year, both at a strike price of $80 per share.
Microsoft has been one of the hottest stocks among members of Congress in the recent period. The maker of the most used operating system in the world garnered interest from 4 different policymakers in 24 disclosed trades in the past quarter. Achieving tremendous success with CEO Satya Nadella at the helm, the company has been living through a period of second youth, with many doing their best to forget the Steve Ballmer days.
The Pelosi family has been long bullish on the company, having acquired positions for the first time all the way back in February of 2020 when the family bought 25,000 shares through call options that were later exercised in March of 2021. The spouses seem to be getting ready to add more to their position, as they bought an additional 150 deep-in-the-money call options on two occasions in May of this year, as it was recently disclosed. Purchased call options are targeting a strike price of $180 per share and are set to expire on the 16th of June 2023. Given that the company is currently selling for roughly $290 per share, the chance of them not adding to their Microsoft position looks slim.
The company recently published its long-awaited fourth-quarter earnings report, falling short both in revenue and earnings estimates. Revenue came in short at $51.87 billion, missing analyst estimates by $490 million, while earnings came in at $2.23 per share, missing analyst estimates by $0.07 per share. However, when looking at the big picture, the company still managed to grow revenues by double digits and provided very positive guidance indicating double-digit growth is here to stay for fiscal 2023 as well.
Recently disclosed purchases of Microsoft's LEAP call options expiring in mid-2023 raise further interest as the tech giant is expecting to close the greatest acquisition in the history of the gaming industry sometime later next year. While the company has been present and operating in the industry for decades, it has only recently begun to double down on establishing a more substantial presence in the expanding market. Microsoft took the tech and gaming world by surprise on January 18th when it announced its plans to acquire Activision Blizzard (ATVI) in a record-breaking $68.7 billion deal. The deal itself has been a topic of continuous debate, as many doubt it will be successful in acquiring regulatory approval. Activision is selling at $79 per share, far below the planned acquisition price of $95 per share that Microsoft is willing to pay. This remains an indication that the market remains largely undecided on whether or not the acquisition will get past regulators. Still, the Pelosi family doubling down on Microsoft could be considered in a way a vote of confidence for the deal.
For a long time, the average John Doe was not always privy to the information on what exact stocks are his public representatives involved in trading and if they are generating successful returns in doing so. With the data collected, now we can attempt to change that. For the purposes of benefitting from the datasets collected, we have created the "Nancy Pelosi" Strategy, which approaches the data in a unique way. The strategy tracks the performance of companies that have been purchased by Rep. Nancy Pelosi. It takes a long position in stocks that have been purchased, and a short position in stocks that have been sold by her or by members of their family. The current top holding, representing more than 40% of the portfolio's NAV, is AllianceBernstein (AB). The strategy is weighted based on the reported size of the disclosed purchases, with an implemented system of daily rebalancing. This strategy has shown a historical CAGR rate of 23.57% across its backtest period.
If one was about to have $100 million invested in the Speaker of the House's stock-picking abilities at the beginning of 2019, the same investment would compound to $212 million as of today, slightly off November high, when the portfolio hit its peak of almost $309 million.
Public pressure seems to be slowly building on Capitol Hill to curb lawmakers’ ability to trade stocks as the nature of their service makes them privy to information not usually available to the public, which is by many considered an unfair advantage they hold over the average investor. The Pelosi's controversial trading activity is generating more public outcry by the day, with the latest drama surrounding the timely purchase of Nvidia not helping her public image one bit.
It remains an open question of how long Congress will be able to deter from bringing forth any meaningful changes to the STOCK act to further limit or fully prohibit the ability of policymakers to trade in stocks. However, until that time arrives, one thing is for sure: there is value to be had in monitoring the trading activity of our country's political leadership. This is what has led us on a path of creating a trading strategy that allowed us to replicate a part of the trading success of the House Speaker. We stand firm by the belief that the average investor should remain open to the idea of utilizing alternative data during their due diligence process in order to level the playing field between himself and the institutional investor.
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.