Derek Pain: Directors' dealings are important signals for shrewd investors
No Pain, No Gain
Saturday 29 January 2011
Director share buying – or selling – is often an important signal for investors. Every week numerous deals are recorded as those at the helm spend or raise cash. Using inside information is, of course, illegal and miscreants should expect prosecution.
Still, stock market history is littered with examples of director transactions providing indirect indications of a group's prospects. But not all of them are what they seem and it is always wise for outsiders to treat what appears obvious with caution. I suppose the most bearish sign is when a director sells. Yet reasons not related to a company's prospects could prompt such action. Divorce settlements are sometimes a major influence; buying a property (or yacht) are other factors; and more mundane costs, such as school fees. There is also the claim directors should not have all their eggs in one basket and should sell down when an often commanding shareholding is held. Although the need to diversify has much to commend it, I cannot avoid a sneaking suspicion a big disposal is a far from encouraging development for other shareholders.
Another reason often put forward for director selling is that a company's stockbroker regards the market in the shares as far too thin and, in City jargon, wants liquidity improved. It is small caps which mainly encounter such demands. A number of directors are encouraged to sell to accommodate the stockbroker. I often wonder why the men and women running a business accede to such requests. There is nothing wrong with a thin market – indeed many players on the stock market undercard are dominated by boardroom shareholdings – and such sell exercises invariably leave us outsiders wondering about the old habit of cashing in while the going is favourable.
Buying shares should be an encouraging signal. However, directors can also make mistakes. It is not unknown for shares to be acquired in the belief a tottering company is actually sound. Sometimes the business fails and the shares are declared worthless. Then the buying optimism is shown to be completely wrong and buyers are left nursing loses. There are also occasions, I would imagine, when director share buying is intended to mislead. Besides insider trading, the rules governing transactions generally relate to timing, such as not trading ahead of stock market announcements. In my view, they have worked well although you cannot legislate for every eventuality.
I like to see directors buying and believe significant shareholdings exude confidence. It was encouraging to see Andy Harrison buying shares in Whitbread, a no pain-no gain portfolio constituent, when he became chief executive. And this month, Blair Jenkins, already a strong shareholder, topped up his stake in small cap constituent SnackTime. Accountancy and wealth management group Lighthouse, another small cap portfolio member, has not attracted much in the way of director dealings recently but its board is already well represented on the shareholders' register.
Even so, it is surprising board members were not tempted to buy by the low share price. It was down to below 8p but has improved after research comments. Surely Lighthouse is worth more than the £12.4m, implied by its shares standing at 9.75p. After all, it has around £14m tucked away although some of its cash is needed to satisfy regulatory requirements? The group is also profitable and pays dividends.
Researcher Brokerlink concluded the shares were cheap; indeed it said they were putting a negative value on the business, which defied logic. Although dramatic changes are scheduled in Lighthouse's world of independent financial advisers, it is well positioned to accommodate them. And year's profits, before special charges, should be around £1.2m.
After the departure of Printing.com, Lighthouse is the longest serving member of the portfolio. The shares were acquired at 17.5p in August 2006, and subsequently climbed to 35p. But they slumped after the banking meltdown. The group's presence in the financial community was a major influence. Impairment charges and other factors had a dramatic impact at the pre-tax level. Still amid the mayhem Lighthouse traded resiliently and, as Brokerlink observes, the shares fell too far.
- 4 #JeSuisEd: People share photos of themselves eating awkwardly in solidarity with Labour leader
- 5 Women think Irish men are the sexiest, survey finds
In defence of liberal democracy
General Election 2015: Post-election 'shambles' looms as 70 per cent of voters say SNP 'should not be able to veto UK government policies'
The Rothschild Libel: Why has it taken 200 years for an anti-Semitic slur that emerged from the Battle of Waterloo to be dismissed?
General Election 2015: UK will be 'run for the wealthy and powerful' if Tories retain power, Labour warns
General election live: SNP suspends two members for disrupting Labour rally
Schools forced to act as 'miniature welfare states' with teachers buying underwear and even haircuts for poor pupils
iJobs Money & Business
£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...
£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...
£27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...
£40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...
Day In a Page
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business