Investment View: Hold your fire on Telecity despite non-exec's deal

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The Independent Online

Telecity: OUR VIEW: buy on weakness; SHARE PRICE: 761p (+4.5p)

Here's an interesting question: just how much should you look at directors' dealings as a guide to buying shares?

Company directors are required to declare any dealings in the companies they oversee and a lot of investors watch announcements concerning these like hawks.

Directors are also, theoretically, barred from buying (or selling) if they are aware of issues that the market isn't aware of. If, for example, things aren't going as well as expected. (Which hasn't always stopped certain directors from selling when things look dicey, of course.)

But when they buy, it could be seen as an indication that they feel the shares have room to grow. After all, they should know.

This is what those who like to watch directors' share dealing activities often believe (with the reverse being true if directors start selling).

The trouble is, the way modern executives are remunerated, particularly at the bigger companies, means it is actually now quite rare to see them dipping into the market to buy their companies' shares with their own money. They get too many for free as part of their bonus packages. Which tells you a lot about the modern executive, if you think about it.

On those rare occasions when they do jump in, it must be an indication that they feel the shares are so cheap they just can't ignore it. Even with all the free ones remuneration committees throw their way. Right?

A word or two of caution. It is often the case that directors buy en masse after their companies' shares have fallen sharply, perhaps as a result of a profit warning. They do this to send a message: we think the company's ok really. Even if it isn't.

Some very big (and really quite sensible) fund managers have a firm rule. They immediately sell on the back of a profit warning for the very good reason that one is very often followed by another, and then another.

As for directors selling, it could be considered a red flag. But it could also mean they are using their shares to buy a new villa somewhere expensive, a new yacht, or (even more likely) to fund a divorce. The life of a high-flying executive isn't terribly conducive to marital harmony.

Unfortunately, stock exchange announcements about director dealings don't have to give any explanation as to why a director has made a move, when they buy or sell.

Perhaps, then, they should?

Which brings us to Telecity. Sahar Elhabashi is a non-executive director of the company, whose most exciting business is data warehousing (and data security). As such it is very much a bellwether for the digital economy. As the latter grows, so does Telecity.

Ms Elhabashi joined as a director a year ago. Her "proper" job is quite glam: she is chief operating officer of Condé Nast's entertainment division. It is mandated with developing video content businesses based on its portfolio of magazines including Vanity Fair and Vogue.

She clearly thinks Telecity's prospects are quite glam, too. She has spent £58,875 on buying 7,500 shares in the company at 785p a pop.

Even though she is a non-executive director, that could be significant. The shares had been on a tear (last year they gained 34 per cent and they've been motoring this year) until, that is, the recent first-quarter results, which highlighted the company's exposure to the euro. There are real worries that the difficulties the single currency is experiencing will filter through to Telecity in the form of reduced earnings. In the company's favour, however, is the fact that the cloud computing revolution is still going strong and companies are continuing to outsource data hosting.

With demand remaining high, Telecity has pricing power. It bought out a major rival last year, and the money it makes from its data centres helps it to fund the construction of new ones, which then generate more money (for more data centres). A real virtuous circle, then.

Yes, the euro's weakness is troubling. But the company still expects to meet earnings forecasts for the full year. Which it will need to, because even though they have taken a dive recently, the shares are still very highly valued at 26 times forecast full-year earnings, falling to 20 times next year.

There should be a yield (forecast at close to 1 per cent) thanks to the company starting to pay dividends, but that's not the reason for buying a growth company like this one. It's just a small bonus. Even with the shares' recent shudder, I'd be a shade wary of buying just yet, notwithstanding Ms Elhabashi's investment. But if they dip below 750p, that would certainly pique my interest.

In the meantime, the stock should be seen as a solid long-term hold. There is still plenty of fuel in the tank to allow the company to carry on growing. The share price might not motor at quite the rate it has over the past couple of years, but it can still reach for those clouds.