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We’ve found that non execs outperform execs by somewhere between 7% and 11% amongst the directors dealing transactions we have observed over the last 18 months. We are unsure as to whether this outperformance is a feature of bear markets, or will continue when share markets are rallying.

Our thesis when we started followthedirectors was that non execs would have a better ‘handle’ on both valuations and the competitive and economic environment due to their involvement in  activities outside the firm on whose board they sit.

A few transactions over the past week where only non execs have been buying shares are worth noting as follows:

Vodafone (VOD, 116p)

announced that on May 22nd that Sir John Bond, the group Chairman, bought 100,000 shares at 116p, taking his holding to 337,000. We looked back at recent history, and found another non exec, Luc Vandevelde, buying 32,500 shares at 120p on March 24th, taking his holding to 72,500 shares.

View on Vodafone : Positive                   Value of directors dealings signal: High/Strong

Eaga (EAGA, 127p)

saw two purchases ny non execs last week, namely Roger Ayland and Malcolm Simpson, who bought 50,000 and 8,000 shares respectively, at around 120p, taking their holdings in the energy efficiency company to 50,000 and 96,000 shares respectively.

View on Eaga : Positive                              Value of directors dealings signal : High/Strong

QinetiQ (QQ., 146p)

last week announced share purchases by non execs Nick Luff and David Lees. Luff bought 20,000 shares at 141p, taking his holding to 70,000 share, and David Lees bought 10,000 shares at just over 144p, taking his holding to 83,000 shares. Back on the 12th of March, the CEO Graham Love had bought 100,000 shares at 141p, pushing his shareholding to over 5 million shares.

Sir John Chisholm, the Executive Chairman, called the top on QinetiQ when he sold 1.5 million shares within 8p of the high, at 220p, on 27th August last year. 

View on QinetiQ: Positive                  Value of directors dealings signal: High/Strong

The CFO of Tesco (TSCO, 365p), Lawrie McIlwee, last Thursday May 28th sold 36,282 shares in the multinational retailer at 370p, taking his holding to 18,000 shares.

We remembered some other recent sales, as a result of Options Exercises. In both cases all of the shares exercised were sold, which we interpret as negative on the basis that it results in a net sale of shares. If the directors had sold only sufficient shares to pay their tax and national insurance liabilities, then the transaction would be viewed as neutral.

On May 12th the IT director Philip Clarke exercised and sold 332,000 shares at 351p, leaving his holding unchanged at over 650,000 shares.

On May 19th Tim Mason, the President and CEO of the US operation, Fresh and Easy, exercised and sold 247,000 shares at 355p, leaving his holding unchanged at 678,000 shares.

View on Tesco: Negative (Directors selling shares)

Strength of Signal: Strong

(source: London Stock Exchange)

I’m thinking of taking some profits on 3i (III, 400p) (theoretical ex rights price 250p)

There will be no new news from this private equity group until the Interim Results, which are to be released in July, maybe with the AGM which is on July 8th (company website Financial calendar http://www.3igroup.com)

In reviewing the media on 3i I’ve come across a few ‘soundbites’ which are worth noting:

May 11th in a CNBC interview 3i Group Communication Director Patrick Dunne admitted the rights issue to be opportunistic: ‘we don’t need the money’.

He then went on to say that private equity valuations were ‘not quite at the go-shopping point’ yet. He also suggested that the target return of 20% was ‘being reviewed‘, that the returns ‘would be much more volatile going forward‘.

I was also drawn to a couple of questions in an article by Simon Nixon at the WSJ, also on May 11th: ‘investors need to ask themselves two questions: Has 3i sufficiently written down its existing £8 billion of assets under management, including £4 billion on its own balance sheet? And will future returns be sufficient on a risk-adjusted basis?’

3i shares are up 94% absolute or 74% relative to the market since our comment of February 25th ‘3i – Five of the seven non execs have bought shares in the last month’.

I’ve sold today half my position in the group.

For all followthedirectors comments on 3i click here.

In our analysis we have found non execs to substantially outperform executive directors when it comes to dealing in shares in their own company, to the tune of around 12-15%.

For further information on this see our post of April 2nd: ‘Non execs make better investors- by far’

There are a few recent transactions worth pointing out because they are by non execs only:

Homeserve (HSV, 1337p)

After announcing a proposal to divest of its  UK Emergency Services business this week, non execs Mark Morris and Andrew Sibbald each bought 2000 shares in the group, at 1278p and 1244p respectively, on the 22nd May and the 20th May respectively.

They each now hold 2000 shares.

Genus (GNS, 616p)

The animal breeding group have seen purchases by three non executive directors this week. On Monday the Non executive Chairman John Hawkins bought 1000 shares at 576p, taking his holding to 5100 shares. Mike Buzzacott bought 1000 shares at 578p, taking his holding to 1000 shares.

And on Tuesday Barry Furr bought 5000 shares at 600p, taking his holding to 8000 shares.  There are no imminent financial results due, but there have been bid rumours in Genus in the past. See our post of October 16th ‘Genus breeding positive directors’.

National Grid (NG., 587p)

Three non execs have bought into National Grid shares. Bob Catell, also a Deputy Chairman, bought 10,000 shares in ADR form, investing about 80,000 pounds, and taking his holding to 50,000 shares (May 21st).

On May 14th, John Allan and Philip Aiken paid 580p for shares, Allan buying 5000 and taking his holding to 7000 shares, and Aiken buying 1500 shares and now owning 3500 shares. The Questor article of May 14th is worth reading.

View on the above: all Positive (directors buying)

Strength of Signal:  all Strong (only non execs buying)

We made some money out of Experian (EXPN, 474p) after buying in November 2007 following directors purchases. We took profits in December 2008, follwing a share sale by non exec David Tyler, recording a 50% outperformance relative to the FTSE 100 share index.

Since then however, Experian shares have continued to perform well, rising by 13% with the market only just in positive territory, rising a paltry 1.6%.

Two transactions on May 20th and 21st have caused us to be more cautious on Experian:

  1. John Peace, the Chairman, has exercised options over 353,000 shares and sold them all, realising 1.75m pounds. He maintains his position at 1.1 million shares.
  2. David Tyler, the non exec who sold shares in December, has sold a further 100,000 shares at 479.55p.

View on Experian: Negative, Directors selling shares

Strength of Signal: Strong

pacelogo The CEO of Pace (PIC, 177.5p), Neil Gaydon, last week exercised options on 850,000 shares at between 63.5p and 74.25p, then sold all 850,000 shares at 177p (May 13th, source London Stock Exchange).

Gaydon continues to hold 41,000 shares and have options over a further 2.3 million shares. We looked back to see if Gaydon had a track record in share transactions, and found some interesting disclosures.

Pace shares were trading at below 40p in June 2006, and ran to a high of 130p 12 months later.

Gaydon and his colleague Anthony Dixon, the Pace Company Secretary, exercised options and sold all their shares in July and August 2007, at prices between 108p and 115p.

Pace shares reached a low again of 35p in November 2008, and have rallied strongly to a high of 186p at the beginning of this month.

Gaydons recent Options Exercise and Sale of all the shares was accompanied again by Anthony Dixon, who sold 135,000 shares at 170p, and also by Chief Operating Officer David McKinney, who sold 250,000 shares at 141p (sales executed between 29th April to 12th May 2009)

We view at share sales following options exercise as follows:

Retention of all shares: Positive ( a net investment by the director)

Sale of sufficient shares to pay for tax and social security: Neutral (no net in- or di-vestment)

Sale of all shares: Negative ( a net disposal by the director)

Pace shares have been hugely volatile, and we  think these Directors Dealings are worth listening to.

View on Pace : Negative (Directors selling shares)

Strength of Signal: Strong (based on individuals track record)

On December 19th, with Johnston Press (JPR, 34.25p) at 12 p, prompted by non exec Ian Russell buying 800,000 shares at 12.25p, we wrote (article: “Johnston Press- option money worth spending?”)

“The jury will remain out on Johnston until the half year results in August 2009 at the earliest.  But the shares certainly won’t be trading at 12 1/4p by then. They will either be worth nothing, or above a pound.”

Nothing has happened to change that opinion. The shares have been as low as 5p, and as high as 41.5p.

One piece of news though supports our view, but is really being used as an excuse to write about Johnston Press: Mr Vickers, an Executive Director of Johnston Press,  bought 7843 shares at 25.5p on May 6th, taking his beneficial holding in the group to 97,000 shares.

So peanuts really. But positive not negative.

View on Johnston Press: Positive (no change)

Strength of signal: Weak (no change)

John Jackson, Non Exec Director of The Restaurant Group (RTN, 157p), and CEO of Jamie Oliver Holdings Limited, prompted us to reiterate our positive signal on The Restaurant Group shares when he tripled his holding on October 20th by buying 200,000 shares at 104p (‘The Restaurant Group Non Exec trebles holding‘).

In March 2008 five directors invested gbp 400k, increasing their positions by between 15 and 50%. This prompted us to view the signal from director dealings as Positive, and of high value (‘STRONG’). See our March 14th comment: ‘Consumer stocks at risk? Not TRG according to directors’.

Jackson this week (May 8th) sold ALL his holding in The Restaurant Group, 300,000 shares, at 161.84p.

This share sale causes us to take profits on The Restaurant Group.

Share performance since March 14th 2008: Shares are up 14% absolute, or up 42% relative to the index (FTSE 250).

Share performance since October 22nd 2008: Shares are up 34% absolute or 10% relative.

View on The Restaurant Group: Negative

Strength of Signal: Medium

For all comments on The Restaurant Group click here.

On October 31st we noticed a significant jump in the ratio of companies in the FTSE 350 index exhibiting share purchases by directors.

Companies in the index which exhibited net Purchases by directors (cumulative gbp50k+ in the month) vs Sales had moved from evens to as high as 10:1.  (See October 31st post: Directors ARE buying shares- Buys outnumber Sells 10:1).

Since October 31st the FTSE 350 index is up 21.5%.

Companies featuring on the followthedirectors ‘STRONG’ signal list as at October 30 2008 have outperformed their relevant stock market indices by over 10% over the period.

Over the subsequent months, the ratio of directors buys versus sells has dropped as follows:

Month            ratio of Buys to Sells in FTSE 350 index

October:               10 : 1

November       2.75: 1

December           1.3: 1

January              1.15: 1

March                  1.0: 1

April                    0.56:1

I’m not too surprised by the falls in directors share purchases,  but the latest data point showing Sells outnumbering Buys by almost 2:1 sends a clear signal, and a bit of a shiver up the spine: Directors think shares are expensive.

If we analyse directors dealings by market segment, then we find that in the FTSE 100 stocks, sells in April outnumber buys by 12:8. yet in the FTSE Small Cap index, directors appear still to be buying, with buys outnumbering sells by 5:1. This ratio hasn’t changed since October, when the ratio was similar. It jumped to 7:1 in November.

The last time we saw Buys below Sells was for the month of June 2007, when the ratio dropped from evens in May to 0.8 in June. Wasn’t that the month the stock market peaked?

We all love to see a stock market recovering, but I personally am taking some money out, and looking for signals when directors start buying again.

‘Sell in May and Go Away’? Read John Mauldins thoughts on http://www.frontlinethoughts.com/index.asp. He analyses May to October share market performance in secular bear markets. Not a pretty picture.

See also The Pragmatic Capitalist: ‘Insider Buying non existent’ [good chart here].

Forbes suggest in ‘When Insiders Sell‘ that we shouldn’t worry too much about the spike in Insider selling, that it could be down to Directors being ‘too leveraged’. [hat tip to FT Alphaville]

For our previous views on the Market, please click on the ‘Market Musings’ tab to the left of this post, or here. This is where you will find the following posts:

April 2nd: Non execs make better investors- by far.

February 4th: Directors buying interest falls away in a sideways market.

December 16th: Directors buying waned in November

October 31st: Directors ARE buying shares- Buys outnumber Sells 10:1

Source: The excellent website ‘www.Digitallook.com‘ is the source of information for the Directors Dealings Buy/Sell ratios given above.

See also Ockham Research : “Insiders are selling into the rally” (April 24th)

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Barratt (BDEV, 144p) are up 90% absolute and 60% relative since January 15th when a price of 75p catalysed my positive view: ‘Barratt- look for buying opportunities’.

We’ve just seen a few minor directors sales at Berkeley Group Holdings, with Pidgeley, Perrins and Carey selling 600,000 shares between them at 960p, reducing their holdings to a combined 6.48m shares (April 29th- source London Stock Exchange).

So these share sales are insignificant in % terms, but I consider them an indicator of a likeley ‘breather’ in the Housebuilding  sectors performance.

So I’m happy to take my profits on Barratt Developments.

View on Barratt Developments: Neutral.

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