Derek Pain: Directors' dealings are important signals for shrewd investors

No Pain, No Gain

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.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

News
election 2015The 10 best quotes of the campaign
News
A caravan being used as a polling station in Ford near Salisbury, during the 2010 election
election 2015The Independent's guide to get you through polling day
News
people
Voices
David Blunkett joins the Labour candidate for Redcar Anna Turley on a campaigning visit last month
voicesWhat I learnt from my years in government, by the former Home Secretary David Blunkett
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Editor-in-chief - Financial Services - City, London

    £60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Guru Careers: Management Accountant

    £27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...

    Guru Careers: Project Manager / Business Analyst

    £40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...

    Day In a Page

    General Election 2015: ‘We will not sit down with Nicola Sturgeon’, says Ed Balls

    'We will not sit down with Nicola Sturgeon'

    In an exclusive interview, Ed Balls says he won't negotiate his first Budget with SNP MPs - even if Labour need their votes to secure its passage
    VE Day 70th anniversary: How ordinary Britons celebrated the end of war in Europe

    How ordinary Britons celebrated VE Day

    Our perception of VE Day usually involves crowds of giddy Britons casting off the shackles of war with gay abandon. The truth was more nuanced
    They came in with William Caxton's printing press, but typefaces still matter in the digital age

    Typefaces still matter in the digital age

    A new typeface once took years to create, now thousands are available at the click of a drop-down menu. So why do most of us still rely on the old classics, asks Meg Carter?
    Discovery of 'missing link' between the two main life-forms on Earth could explain evolution of animals, say scientists

    'Missing link' between Earth's two life-forms found

    New microbial species tells us something about our dark past, say scientists
    The Pan Am Experience is a 'flight' back to the 1970s that never takes off - at least, not literally

    Pan Am Experience: A 'flight' back to the 70s

    Tim Walker checks in and checks out a four-hour journey with a difference
    Humans aren't alone in indulging in politics - it's everywhere in the animal world

    Humans aren't alone in indulging in politics

    Voting, mutual back-scratching, coups and charismatic leaders - it's everywhere in the animal world
    Crisp sales are in decline - but this tasty trivia might tempt back the turncoats

    Crisp sales are in decline

    As a nation we're filling up on popcorn and pitta chips and forsaking their potato-based predecessors
    Ronald McDonald the muse? Why Banksy, Ron English and Keith Coventry are lovin' Maccy D's

    Ronald McDonald the muse

    A new wave of artists is taking inspiration from the fast food chain
    13 best picnic blankets

    13 best picnic blankets

    Dine al fresco without the grass stains and damp bottoms with something from our pick of picnic rugs
    Barcelona 3 Bayern Munich 0 player ratings: Lionel Messi scores twice - but does he score highest in our ratings?

    Barcelona vs Bayern Munich player ratings

    Lionel Messi scores twice - but does he score highest in our ratings?
    Martin Guptill: Explosive New Zealand batsman who sets the range for Kiwis' big guns

    Explosive batsman who sets the range for Kiwis' big guns

    Martin Guptill has smashed early runs for Derbyshire and tells Richard Edwards to expect more from the 'freakish' Brendon McCullum and his buoyant team during their tour of England
    General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

    Miliband's unlikely journey from hapless geek to heart-throb

    He was meant to be Labour's biggest handicap - but has become almost an asset
    General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

    On the margins

    From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
    Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

    'This is the battle of young Egypt for the future of our country'

    Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
    Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

    Why patients must rely less on doctors

    Improving our own health is the 'blockbuster drug of the century'