The benefits of following what directors buy, not what they say

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The Independent Online
Actions, they say, speak far louder than words. Smooth-talking executives employing the latest in fashionable management-speak may win round even the most hard-nosed investors to their cause.

But when directors actually dip into their own pockets to buy stock in their company or sell to raise some cash - even if only to pay for the kids' public school fees - their actions can be a window on the soul of a business and shareholders should sit up and take notice.

Historically, dealings by company directors in their own shares have provided good signals for the market sectors and individual stocks.

According to research just published by Philip Wolstencroft, UK market strategist at US investment bank Merrill Lynch, buying by insiders has been particularly successful, usually on a one-year view.

And when director selling is combined with a downward trend in earnings forecasts, sectors and stocks tend to underperform the rest of the stock market.

Surveying the latest trends in directors' dealings, Mr Wolstencroft concludes that bosses remain bullish about the UK stock market, despite the recent rise in share prices.

He notes that in September, 224 directors bought shares and 101 sold, leaving the buy/sell ratio fairly high at 2.2. His analysis, which excludes all options-related transactions, bonuses and trades under pounds 1,000, also finds that directors are unusually positive about smaller companies.

He suspects that directors of smaller companies, aware of the cyclical nature of their businesses, are seeing an improving trend and are buying accordingly. One of the most heavily bought sectors in the past three months has been engineering, though insiders are also warming to general industrial stocks.

As for individual shares, noteworthy buying has been seen in multi-utility Scottish Power, leisure group Rank and clothes retailer Burton.

By contrast Marks & Spencer has been the most heavily sold FTSE 350 stock in the past six months, suggesting that although profits forecasts are edging up, investors may be losing their enthusiasm for retailers.

Among smaller companies, tour operator First Choice came out top when ranked by the number of directors who have been net buyers over the past six months, closely followed by Dairy Crest, the processing arm of the old milk marketing board, and ML Holdings, the aerospace and defence group. The biggest net sellers over the same period were found at high-flying restaurant chain PizzaExpress.

This morning Premier Farnell, the recently-merged distribution group, kicks off a fairly quiet week for company reporting. The figures are unlikely to be accompanied by further news on the progress of the recent merger. The figures, which will contain just three months' contribution from Premier, are likely to reflect the impact of weaker semiconductor prices and a catalogue business being restrained by slower-than-expected growth in the UK economy. Analysts are looking for pre-tax profits in the six months to July of around pounds 60m versus pounds 36m last time, with the dividend raised from 4.6p to 5.3p.

Selling its US fresh produce distribution business last week for pounds 73.5m has rather stolen the thunder from Albert Fisher's finals on Thursday. The deal was a long time coming, having been flagged in April. NatWest thinks that relief the deal has finally been done should more than compensate for the terms being slightly less favourable than originally thought. Although the shares have underperformed the market by 15 per cent since April, NatWest feels Fisher's 11.9 per cent yield should preclude further weakness. In the year to August 1996, the broker looks for pre-tax profits before exceptional items of pounds 40.5m, but the forecast for 1997 has been trimmed by pounds 3m to pounds 43m to reflect the earnings dilution that comes with the US deal and weaker European currencies.

Worshippers of the grain will be looking out for preliminary figures from Highland Distilleries on Monday and from Burn Stewart two days later.

Most attention will focus on Highland's progress on integrating whisky distiller Macallan-Glenlivet, bought earlier this year for pounds 188m, and news on the pricing strategy for Highland's Famous Grouse blend in the run-up to the key Christmas selling period. Analysts expect pre-tax profits for the year to August of about pounds 41m versus pounds 43m last time.

Burn Stewart warned earlier this month that an unresolved accounting issue had caused it to delay publication of its year-end results by two weeks. It said the issue had come up late in auditing, but declined to give further detail. The lack of a trading statement gave some comfort to analysts, but they are concerned that with whisky prices weakening in recent years, Burn Stewart may have to write down the value of the stocks. With forecast earnings per share of 5.6p there is also a question mark over the 5p dividend being maintained.

On Wednesday, Smiths Industries is expected to report pre-exceptional profits of up to pounds 165m in the year to July versus pounds 138m last time. Analysts expect the results to benefit from the inclusion of recent acquisitions in the industrial and a good performance from the aerospace side. They will also be looking for comments on the state of the US healthcare market, where there is speculation about how robust margins are in its medical division.

Eight new store openings, including a first presence in the Greater London area, are likely to have done wonders for sales at retailer DFS Furniture, though possibly at the expense of margins as store opening and advertising costs rise. NatWest forecasts pre-tax profits of pounds 30m versus pounds 26.2m for the year to July.

Ties tend to bought in the run-up to Christmas so Tuesday's first-half figures from Tie Rack will not be much of a guide to the full-year outcome. Indeed, interims typically account for only 5-6 per cent of annual profits. Pre-tax profits should come in around pounds 500,000, in line with a year ago.