Directors deals: what does it all mean?
| by Andrea Page 01 Nov 2003 Topic: Personal Finance |
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Andrea Page reports on how watching the buying and selling activities of company directors can afford some clues about where stock markets are going, and which individual companies could be bucking the overall trends Before the FTSE 100 regained ground this year, many people would rather have backed a lame horse than risked further money on equities. UK company bosses, on the other hand, were taking advantage of limping prices to buy up more shares in their organisations. According to Directors Deals, which monitors and analyses this activity, during some weeks in 2002 there were up to 20 director buys per sell (the long-term ratio is just under four). But in the month to mid-September 2003, directors sold over £159m worth of shares, against the typical monthly average of around £50m, says financial news and analysis website Digital Look. Major sales of late include the managing director of housebuilder Berkeley netting nearly £9m in September by selling one million shares, around one-third of his holding, and the chief executive of product testing group Intertek selling £7.7m of shares, equal to half his holding. The technology sector exemplifies this trend: 'The market had fallen so far by September last year that many directors clearly felt their shares were undervalued and were buying. Now we're regularly seeing [sales] of over £1m in value,' says Michael Tindale, director at Directors Deals. He adds that, at present, insurance is about the only sector that's being more heavily bought than sold. 'Directors understand what's happening in that business, they have an insight into its future and there's also an element of being rewarded in shares. They want to get the best out of that holding too,' says Digital Look's director, Andy Yates. 'Directors deals could put a stock on your radar that you may not otherwise hear about,' says Tindale. He cites computer services company Xansa, whose chief executive and chairman respectively bought 30,000 shares at 44p in September 2002 and 40,000 shares at 39.5p in October 2002. Recently another director sold 300,000 shares at 103p. Directors deals must be assessed carefully because executives often buy and sell for reasons not linked to their view of the company's prospects. A brace of directors may buy in quick succession because they're actually new appointees who are obliged to purchase some shares, or a director may be selling simply to cover a tax bill attached to the granting of share options. In some cases the director may actually be trading on behalf of the pension fund. Andy Yates says some of the recent huge sales should raise a note of caution for private investors. However, he thinks it's probably too early to judge whether these directors are concerned about future share price performance, because many executives have been sitting on a lot of stock or share options for a long time and may just be taking an opportunity to realise some profit. Digital Look's research, conducted over six months last year, suggests that the share price of companies changed very little after significant sales by directors, because of the variety of motives for selling. Patrick Sherwen, secret buying editor at financial website Citywire, says a director selling can be an alarm bell but only where you've also researched the company thoroughly and still think it may be overvalued. He notes that the JJB Sports chairman's recent sale of £1m of shares could be seen as sending a message of uncertainty to investors at a time when sentiment on the company is improving. Subscription-based services like Directors Deals (£25 or £35 a month) and Citywire (£99 a year) offer background analysis of the deal, and flag up those that are for investment reasons. Digital Look's daily roundup of deals is free, as are tools like 'heatmaps' to help you spot companies with heavier dealing activity, and track share price performance versus director trades. In terms of potential opportunities, Digital Look says its research suggests companies whose directors bought a 'very significant' amount of shares also saw their average share price rise strongly. But, again, it's about doing your homework. Sherwen says a recent deal by the chief executive of Regal Petroleum could be interesting. Vasile Frank Timis bought £50,000 of shares in early October despite a sharp decline in the share price after the company announced production levels are likely to be disappointing. Deals should be viewed in context; what initially looks like a significant buy may simply be a director reinvesting a dividend from a stake of 500,000 shares. Directors Deals tends not to view a deal worth under £15,000 as especially significant and Citywire sets the bar at £20,000. Actions by senior executives like the chief executive or finance director are also more notable. A 'sector expert' with several other directorships in that market may also suggest improved insight, says Sherwen. (Citywire covers individual directors' circumstances and experience in its analysis.) It's worth looking out for a pattern of several directors buying over a couple of weeks to a month. However, Sherwen says a group who buy on the same day 'can often be just a bit of PR'. Heath Dacre, equity strategist at brokers GNI, says it's a bullish signal where three or four directors buy just prior to the closed period before company results are announced (during which time directors cannot trade). 'Equally after results are announced and the share price has moved, it's still bullish as they'll know how trading has gone from the end of the accounting period to when they purchased.' He'd certainly take note if a number of directors were to sell directly before the closed period. Tindale advises focusing on sectors rather than trying to assess individual trades - Directors Deals provides sector-wide analysis, while you can see net director buying or selling on individual companies within different sectors at Digital Look. Directors Deals also 'scores' individual directors based on share price performance between one and 18 months after their trade - some are better than others at judging the optimum time to buy and sell, says Tindale. And Dacre says that directors deals in smaller, less liquid companies which people aren't following so closely can raise his interest; for example, the chief executive and finance director of Brit Insurance Holdings both upped their shareholdings recently after the company announced a record half-year profit. Digital Look's research into directors deals concluded that directors selling a very large parcel of shares should explain their actions rather than simply notifying the Stock Exchange. In the meantime, the message from analysts is clear - research the company thoroughly and look at broker opinions too. 'Directors deals are one club in the investor's golf bag,' says Tindale.
www.citywire.co.uk | |