For share bargains, follow the directors

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The Independent Online
INSIDE knowledge is still ruling the stock market. A year-long analysis by Smith New Court, the stockbrokers, shows that despite strict rules on directors' dealings, the share purchases of those who know the most about a company are a good guide to good performance.

Last summer Philip Wolstencroft, a market strategist at SNC, chose 10 large companies where directors had bought shares and recommended that investors follow suit. The companies have outperformed the market by 30 per cent on aggregate over the past year. The shares were Racal Electronics, P&O, London International Group, Ladbroke, Great Portland Estates, BP, Tarmac, British Land, Guardian Royal Exchange and Williams Holdings. Of these, seven have outperformed the FT-A All Share index, two have underperformed and one has broken even.

Mr Wolstencroft also built up a portfolio of 10 other 'insider stocks' based on directors' share purchases in the second half of last year. The shares included were British Aerospace, Hillsdown, Burton, Asda, Great Portland Estates, Sedgwick, British Land, Wellcome, Forte and Granada. This portfolio has outperformed the FT All Share by 40 per cent.

The analysis shows that in the case of BAe, directors were investing at a time when most analysts were cutting their profit estimates. They are now showing a decent profit.

Mr Wolstencroft has constructed a new portfolio based on directors' purchases over the past few months. His strongest recommendation is TI Group, where eight directors bought pounds 141,000 worth of shares at an average price of 297p during April and May. The current price is 357p.