No Pain, No Gain: Our Man's Portfolio; Take a tip from the boys in the boardroom

DIRECTOR BUYING can be a signal that shares are undervalued. If the boys in the boardroom, often with share options and other incentive perks, are prepared to put their hands in their pockets like any other investor, then they must think they are on to a good thing.

And they should know; they are obviously in the best position to appreciate how a company is faring.

There have been some intriguing examples of the bosses picking up shares in the past few weeks.

Directors of Paramount, the pub chain, have topped up their admittedly modest shareholdings; the men at the Scotch whisky distiller Burn Stewart have been in the market and so have the leaders of John Lusty, the food group.

All three companies have experienced trading difficulties. Paramount and Burn Stewart are long- time members of the walking wounded brigade; John Lusty is a more recent casualty.

Paramount arrived on the stock market via a reverse takeover of a games group previously traded on one of the now defunct over-the-counter share markets which boomed briefly in the 1980s. It was probably the first of the now flourishing band of pub groups to come to the City.

It has not had a cheerful time. Profits have been erratic although some dividends have been paid. But its position deteriorated so alarmingly that a rescue operation had to be mounted with Paul Davies, an experienced pub man, drafted in as chief executive.

Burn Stewart's sobering time stemmed from its supermarket customers squeezing margins and problems in its important Taiwan market. Lusty appeared to be a growth stock until the dreaded profits warning arrived.

Naturally the trio's shares have seen better days although the recent rounds of director buying have had the predictable impact. Paramount has risen from its 10p low to 15p, although the little tweak upwards is scant consolation for any unfortunate soul who piled in at 100p-plus. Burn Stewart is up from around 10p to 17.5p but has been as high as 144p. And Lusty, 4p to 5.75p, has reached 12.5p.

There are obviously reasons for looking at each of the dismal threesome with a view to investing. Paramount is back in profits; the Burn Stewart board, reporting increased interim losses of pounds 2.5m against pounds 1.7m, has said the company is over the worst and capable of returning to profit. And at John Lusty the warning was that trading had not lived up to best expectations but that profits for the year ending March would be "slightly" ahead of last year's pounds 1.9m.

Of the three I think Paramount is the best bet. The undercard can be notoriously risky but the company seems to have put the dark days behind and seems well on the road to recovery.

The group has 149 pubs, all tenanted. It has spent heavily bringing its estate up to scratch after what would appear to have been a period of neglect. In the year to last May pre-tax profits came out at pounds 539,000 against a pounds 1.4m loss. For the six months to November profits were pounds 236,000, up from pounds 81,000.

Paramount is not paying preference dividends and the arrears are still mounting. It would be unwise to expect a return to ordinary dividend payments in the near future.

But the group is clearly on the comeback trail and it would not be surprising if it got involved in the merger ferment which is enveloping the pub chains. It would make an ideal target for another quoted group or could easily be the vehicle for bringing one of the unquoted chains to market; most are backed by venture capitalists who must be keen to cash in their chips.

Paramount, which has been around so long as a quoted group it has acquired a rather tired investment image, has an impressive roll call of major shareholders.

Greenalls (15.5 per cent); Bass (4.2 per cent) and the Burtonwood Brewery (8.2 per cent) mostly collected their stakes in exchange for pubs. But Nomura, the Japanese investment bank which has emerged as the nation's biggest pub landlord, is sitting in there with 9.4 per cent and has yet to complete a pub deal with Paramount.