Investment View: If a top executive dumps shares, we should be told why
Tuesday 02 October 2012
IG Group. Our view: sell. Price: 449.3p
Intermediate Capital. Our view: Hold. Price: 303.6p
What do you do if an executive dumps half his stake in a company you've invested in? My natural inclination would be to follow their lead, in which case you should sell IG Group.
Last week it emerged that the company's chief operating officer, Peter Hetherington, offloaded 156,012 shares, realising £705,642. He now holds just 100,000.
The sale came a couple of weeks after a less-than-stellar trading statement which showed that revenues were down across the board.
IG tends to get labelled as a financial bookie because its best-known product is financial spreadbetting. But it's perhaps better to consider it as a broker that allows retail punters to trade financial markets.
The problem for IG is that its clients thrive on volatility. When markets are choppy they like it, because you can dip in and out of the markets and make lots of money. Or lose lots. When they're calmer, as they have been this year, it's tough to make a turn and punters sit on their hands.
IG's trading statement looked anything but pretty, although last year was exceptional and revenues are still ahead of where they were in 2010. Mr Hetherington's sale, however, suggests that he doesn't expect things to pick up soon.
Now there may be a very good reason for it, but the company refused to provide even a vague explanation, and that's a little cheap. Shareholders have to pay lots of money to the people who run their businesses. They are entitled to an explanation if those people dump stock.
When I last wrote about IG on 21 February the shares stood at 477p, and I said hold. They have recently been showing some of the volatility IG punters love, and a bumpy few months has left them a shade lower than that.
IG has been exporting its model overseas with great success, and still has good growth potential. But at 12 times forecast earnings for the year ending 31 March, the shares aren't bargains, even though the 5 per cent yield is very solid.
IG's long-term potential remains good, but Mr Hetherington's move doesn't make me over-optimistic that the shares are going to do much in the short to medium term. Follow his advice: sell.
The other company I've been following from the ragbag of businesses that make up the "other financials" sector is Intermediate Capital, which provides "mezzanine finance" to other firms. Mezz is a sort of halfway house between debt and equity. Intermediate Capital acts both as lender and as an investment manager, setting up mezz funds in which others invest. With banks reluctant to lend to anyone, and taking an ultra safety first approach when they do, it provides opportunities for the likes of Intermediate Capital.
The company is in The Independent's 10 to follow for 2012, and it closed 2011 at 228.8p. When I updated in February it had broken through the 280p barrier, and having eased back during the summer the shares have been rising again. They are now above 300p.
If you did buy at 228.8p I wouldn't put you off taking some profits right now. But long term I still think there is an argument for holding this stock. Its recent trading statement was a rosy one. The multiple is still fair, at 9.7 times forecast full-year earnings for the year to 31 March, while the yield is impressive at 6.4 per cent, covered 1.6 times by earnings.
I'd be comfortable with Intermediate Capital in my portfolio as a long-term hold because its prospects look sound.
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