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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.
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.
Regards,
Simon Winfield
followthedirectors.co.uk
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- FT.com 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