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Eaga (EAGA, 112.5p), the UK heating system provider for social housing, has announced that the CEO and CFO are each selling 1.1m shares ‘to satisfy tax liabilities incurred at IPO which are due shortly, ……..and to provide an element of liquidity‘ (Company statement November 25th, source London Stock Exchange).

In April eaga directors bought shares, taking advantage of a depressed share price resulting from costs concerns primarily related to copper prices. This prompted us to look at eagas valuation, and its comparison with Connaught (CNT, 366p), a similar company, where directors had been selling shares.

Since April 30th ‘Connaught (directors selling) vs Eaga (directors buying)‘ Eaga are down 13.5%, the FTSE 250 index is down by over 40%, and Connaught are down 8.67%.

If the CEO and CFO are selling shares, then maybe we should also.

So we close our positive view on eaga with a 27% relative performance vs the FTSE 250, and a -5% relative performance vs Connaught.

View on eaga- Negative – directors selling shares.

Strength of signal- Medium

For all followthedirectors comments on eaga click here.

Share transactions:

John Clough CEO sold 1.1m shares at 110p taking his holding to 5.236m shares.

Ian McLeod CFO sold 1.1m shares at 110p taking his holding to 3.982m shares.

On October 12th I pointed to Xstrata (XTA, 862p) non execs purchases as an early positive (although not strong) signal for Xstrata “Xstrata non execs catch a falling knife”.

I was particularly impressed by the volume and timing of selling by Xstrata management earlier in the year:

“If we look back to earlier this year, a number of executive directors including Trevor Reid (CFO), Santiago Zalmdumide (Executive Director), and Michael Davis (CEO) all exercised options and sold all their shares at between 3470p and 4342p (source: Company website, Digitallook, London Stock Exchange)” .

Since October 12th Claude Lamoureux (non exec) has invested another GBP 50k or so by buying 5000 shares at 1093p (November 7th), and David Rough (non exec) has bought 3000 shares at 681p (November 21st).

I use this post only as an opportunity to highlight Mr Roughs investment skills:

Rough sold 3605 shares in Xstrata at 3508p in March 2008.

Rough bought 3000 shares in Xstrata at 681p on November 21st 2008.

David Rough has an extensive history in investing, retiring in 2001 from his position as Chief Investment Officer for Legal and General, but maintaining non exec positions at Xstrata, Land Secs and Friends Provident.

Mr Rough, who joined L&G from Royal Insurance in 1989, earned a reputation for being almost alone among fund managers in openly criticising companies or institutions for treating shareholders in a shoddy way. He is also credited with being behind the fast growth of L&G’s fund management arm, which has expanded from £18.5bn to £113bn in the last 10 years and was adding £1bn a month by last year. (Independent October 19 2001).

View on Xstrata- remains positive – directors buying.

Strength of signal- MEDIUM- three non execs buying shares. Will turn to ‘strong’ when we see an executive director buying shares.



jonathan-davieI’m sure Jonathan Davie wouldn’t appreciate the term ‘veteran’, but having entered the world of stock-jobbing with the firm of George Hill on the Stock Exchange floor in 1969, I’m happy to classify him as one of the more experienced men working today, with three, now four, bear markets under his belt.

I’ve worked with Davie, the Non Executive Chairman at IG Group (IGG, 211p) before. Apart from being a charming gentleman, he knows the markets well, and has unbridled passion for them too.

So his purchase of 90,000 shares in IG Group at 183p last week, post the pre close update, results in IG going on my watchlist. Davie now owns 1m shares in IG, so on a relative basis this is just a toe in the water for him.

Davie sold 880,000 shares when the going was good, between October 2006 and March this year, at an average price of 311p. He was bettered in his sales only by his Chief Operating Officer Peter Hetherington, who sold almost 40% of his holding, or 1m shares, at 400p in October 2007, within 7% of the all time high achieved the same month.

The press and the market were pretty critical of IG’s pre close statement last week, with the shares falling by almost a quarter. Of particular concern was the leap in bad debts, which IG said “relate to a small proportion of the client base”, and 80% of them were said to occur in the October mayhem (Telegraph Questor November 20th). Could this repeat itself? Sure, why not. But I’m sure IG have learnt from this. 

What would I like to see to become more positive?

1. Davie buying more shares. He realised GBP 2m through his sales, and has reinvested less than 7% of that.

2. COO Peter Hetherington buying shares. He gets full marks for selling at the top. I’m happy to wait for his buy signal too.

View on IG Group- Positive, director buying shares

Strength of signal- Weak, only one director buying, and in relatively minimal size.

IG Group go on the watchlist.

See also note of January 20th : ‘Burberry Delights’.

burberry-checkLast week Burberry (BRBY, 170p) warned ‘of tough conditions going into Christmas’ (Telegraph 18 November).The shares fell 12%, and then management started buying.

A mixed message you think?

Angela Ahrendts, Burberrys CEO, says ‘We’ve seen it all’. She refers to having a very seasoned management team, and plenty of experience of tough times: SARS, 9/11, Asian crisis.

Ahrendts herself has plenty of experience, having held senior positions at Donna Karan, Henri Bendel and Liz Claiborne before landing as CEO at Burberrys in October 2005, taking the place of Rose Marie Bravo who resurrected the brand.

Do Ahrendts team believe they can battle it out?

It seems so. John Peace (Chairman), Joy Frommer (PDMR) and Pascal Perrier (President Asia Pacific) have all joined Angela Ahrendts in buying shares on November 20th and 21st, investing almost GBP 400,000 between them, at prices between 172p and 174p, and increasing their holdings by an average of 40%.

They were joined by three of the four non execs, Bowman, Tyler and Carter, who invested about GBP 74,000 between them, increasing their positions by an average of 80 odd %, and paying between 176p and 184p on November 19th.

The only exec board member who didn’t buy shares was CFO Stacy Cartwright, who may still be suffering shellshock from having paid just shy of 500p five months ago. Ahrendts paid the same price for 135,000 shares.

In hindsight, the best sales of stock were made by Rose Marie Bravo, as she managed her exit from the group, selling 4 million shares at 421p and 446p between July 2005 and July 2006.

The worst purchases were made by Ahrendts and Cartwright in June 2007, when they paid within 3% of the all time high, buying 82,000 and 37,000 shares respectively at 701p. Cartwright wisely cut her losses, selling at 659p within two months.

I feel happier with these purchases than I did when Ahrendts paid 496p in June, because they are supported by other board members, both executive and non executive directors, as well as two senior managers of the group.

View on Burberry: Positive- directors buying shares

Strength of Signal: STRONG- Five directors of seven buying shares. Increase in shareholding averages above 40%.

Dear Reader,

The great unknown is with us. Or as Bill Bonner would describe the current environment:

 “Into the wild. Yes, dear reader, we are going where no man ever went before… into the wild. All around us is virgin territory. No one has ever been here before.” (The Daily Reckoning- November 19th).

The great unkown is all around us. I thought that in a market where information was scarce, directors dealings would give us an indication of either current trading, directors views on current share valuation, or ideally both of the above.

Until GKN:

October 28th- Five directors of GKN increase their holdings by about 75% at around the 100p level (followthedirectors October 30th).

November 14th- ‘Issuing its second revision to guidance in three weeks, GKN said output at its driveline and powder metallurgy divisions would be sharply lower following a “further rapid and material decline in conditions in its global automotive markets” (Reuters November 14th).

And Laird, and probably many others still to come.

Which only goes to show that the directors themselves have no clue as to what is going on out there. Which means we are in uncharted waters, in the great unknown, or ‘into the wild’.

I shall endeavour to continue to give you my interpretation of directors dealing activity, but that must be almost worthless if the directors themselves have no clue what is going on in their own businesses from one week to the next.

I suspect it could take a few months for the smoke to clear. In the meantime it may be that directors selling activity is a better indicator of future risks in their businesses.

Please bear with me.


Simon Winfield

Lets start with the good news!

We’ve closed our cautious view on HSBC (November 14th article here), with a 10% absolute return or a 20% relative return over a month. We linked directors share sales with an expected increase in negative newsflow over China’s economy, and saw the shares weaker to reflect this. Maybe this is too short term a view, especially with reports that Chinas power generation ‘in October is down 4% from a year earlier‘ (The Australian October 15th).

Allscripts (MDRX) has exhibited further director buying activity this week, with Misys non execs John King and Sir Dominic Cadbury buying 10,000 shares each at $7.23 and $7.27 respectively . This is in addition to the Allscripts CEO Glen Tullman buying 100,000 shares at $5.11 on November 4th, and Misys CEO Mile Lawrie buying 70,000 shares for $5.09 on October 27th. Allscripts are a NYSE listed company, majority owned by Misys. Allscripts shares are up 39% since our article of October 30th.

I was intrigued by Babcock, where the CEO Peter Rogers bought shares for the first time in four years this week (see ‘Babcock CEO buys shares‘). This brings to seven the number of UK engineering companies where we have seen significant director buying activity, namely Babcock, Weir Group, IMI, Senior, Bodycote, John Wood and GKN. Which brings me to the bad news.

Only a couple of weeks ago, on October 28th, Nigel Stein, CEO of GKNs Automotive division, bought 84,000 shares in the group at 100.5p, taking his holding to 209,000 shares (see ‘Head of GKN Automotive doubles shareholding‘). Then along comes another profit warning, to the effect that orders have collapsed in two divisions, one of which is Automotive, in the last seven days. The stock price fell from 107p on Thursday to close at 87.5p on Friday. If Stein doesn’t know what’s going on, who does?

Another company that loves profit warnings is Rentokil, ‘the royal rat catcher’. I suggested in ‘Rats, Ships and Rentokil’ that a share sale by the Divisional Managing Director of Asia, David Liu, might be the precursor to further negative newsflow.

Lastly, in the small cap arena, Directors of TT Electronics were seen to accelerate share purchases, buying six times as many shares in October as they had bought in the previous 12 months. The next news on TT is likely to be a pre close statement in late December. See ‘TT Electronics sees an acceleration in directors buying activity’.

News Ahead

November 19th sees IMIs Interim Management Statement. I expect this to be positive in light of recent director buying activity. But after Fridays warning from GKN, who knows.

And November 26th is the scheduled date for De La Rues Earnings release. Remember that the CEO and CFO raised about GBP 1 million between them by selling shares in mid September (‘Currency Printers Cash In’). The shares have outperformed the FTSE 250 by 17% since then. Citigroup apparently downgraded the stock last week in anticipation of falling emerging markets revenues (Guardian November 10th). I agree, I think the risks are on the downside for De La Rue.

Follow up on our HSBC call of October 12th:

Recent negative newsflow for HSBC (HSBA, 702p) is now mostly in the price.

‘The extent of the slowdown in the Chinese economy became clearer on Thursday when the government disclosed that the rate of increase of industrial production had dropped to the lowest level in seven years’ (Source- November 13th 2008).

The FT goes on to say ‘Four days after unveiling a massive fiscal stimulus programme, the government said that industrial production increased by 8.2 per cent in October – well below forecasts’.

I suspect that the market now knows much (if not all) of what the HSBC directors knew back in early October when they sold their shares (see followthedirectors comment of October 12th ‘ HSBC- Directors Sell- ‘Credit tightening’ now hitting China growth’).

In the four weeks since our October 12th comment, HSBC are down 10% while the FTSE 100 is up 9%.

For all our comments on HSBC click here.

Rats come to mind whenever Rentokil is mentioned. And now sinking ships lurch in from stage left.

Rentokil (RTO, 44p)  announced yesterday that on November 13th David Liu, the Divisional Managing Director of Asia Pacific, had bought 130,000 shares at 45.5p (possibly to crystallise a loss), and sold 210,000 shares at 45.5p, leaving him with no position in the ‘Royal Rat Catcher’. Liu joined Rentokil from Aegis in 2005.

Directors sales at Rentokil have been few and far between. In fact the only independent sale (not connected to an options exercise) was by non exec Peter Bamford in October 2007, when he sold 10,000 shares at 168p. Though he still holds 38,000 shares.

Executive directors purchases over the last three years carry very little weight.

Rentokil recently announced third quarter results with an update on cost cutting/restructuring progress (Telegraph comment here).

I suspect trading conditions for a service company like Rentokil can only deteriorate in this environment.

View on Rentokil- Negative- PDMR selling

Strength of Signal- Weak


Babcock’s (BAB, 443p) CEO Peter Rogers on November 11th invested over GBP 100k in the group, buying 25,000 shares at 412p after announcing Interim results, taking his holding to 125,000 shares.

I would normally discount this as an investment signal, needing to see him supported by other directors before I bought the shares for myself.

Then I looked at the historical directors dealing activity in Babcock using Digitallook (website), which took me back to 2002.

There are a couple of interesting points to make:

  1. There appear to have been a total of only 17 directors transactions over the last six years.
  2. Only five directors have been active.
  3. Rogers purchase is the first significant purchase by ANY director in four years.
  4. The directors track record looks pretty convincing.

Rogers last bought shares in August 2004, when he paid 106p for 80,000 shares. In September 2002 he paid 102p for 20,000 shares.

In June 2007 Rogers sold 253,000 shares at 547p.

His colleague Gordon Campbell, then Executive Chairman, sold around 300,000 shares between March and September of this year, scoring a bullseye when he sold some of his shares within 7p of the alltime high of 647p in June 2008.

Rogers isn’t completely alone in his purchase. CFO Bill Tame bought 3162 shares at 474p on September 30th 2008, taking his holding to 29,351 shares.

In view therefore of the excellent track record and the sporadic activity, I’m suggesting that Rogers’ transaction of Tuesday is a significant signal for potential investors in the group. Ideally I’d like to see Rogers putting more of the GBP 1.4m he raised in June 2007 back in to the shares, as well as investments by other directors.

I would caution though that he clearly takes a long term view, holding the shares he bought in the low 100’s for between three and five years, quintupling his money in the process.

View on Babcock International Group: Positive- CEO and CFO buying shares

Signal strength: STRONG – excellent track record, but need to take long term view.

From November 2007 to September 2008, directors of TT Electronics (TTG, 45p, Small Cap)  bought roughly 200,000 shares.

In October 2008 the activity accelerated, with five of the groups seven directors buying over 1.3m shares.

The directors dealing activity exhibited other favourable characteristics such as a significant % increase in shareholdings of the directors who bought shares.

John Newman, Chairman, bought 1.25m shares at 47p taking his holding to 10.8m shares.

Shatish Dasani, CFO, bought 35,000 shares at 48p, taking his holding to 100,000 shares.

Sean Watson, a non executive director, bought 55,000 shares at 46p, taking his holding to 62,000 shares.

David Crowther, another non exec, bought 20,000 shares at 47p, taking his holding to 40,000 shares.

James Armstrong, the Corporate Development Director, bought 21,000 shares at 44p, taking his holding to 71,000 shares.

TT make sensors and systems for the defence, aerospace, automotive markets, as well as telecoms and industrial electronics (company website). 

This rings a bell to remind us of the aggressive directors buying in the engineering stocks (see ’25 directors buy shares in UK engineering companies‘ October 28th           ).

Next news? With a December year end, we may see a pre close statement in the week before Christmas.

View on TT Electronics: POSITIVE- Directors buying shares

Strength of Signal : STRONG– Five directors buying, average incraese in position above 50%, in the region of GBP 500k invested, potential good (reassuring might be more appropriate in these times) news ahead.

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November 2008