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The headline above features in todays FT (link to article).
The article quotes research from TrimTabs as follows:
‘Share sales by so-called company insiders are outstripping purchases so far this month by more than 22 times. TrimTabs, the investment research company, said insiders of S&P 500 listed companies have unloaded $2.6bn in shares in June, compared with purchases of just $120m.
“The smartest players in the US stock market – the top insiders who run public companies – are not betting their own money on an economic recovery,” said Charles Biderman, chief executive of TrimTabs.’
See articles discussing this on followthedirectors as follows:
June 6th ‘Despite Greenshoots Insider Sales Spike’
May 4th ‘Directors selling shares. Is the market expensive?’
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)
Directors share performances
We’ve analysed the share performance of all transactions commented on on this website.
That totals comments on more than 100 company transactions, and over 350 transactions by individual directors, both executive and non exec, from November 2007 to February 2009.
If you had followed transactions by executive directors, where they were not accompanied by transactions by non execs, then the companies you would have bought or sold would have underperformed the market by 6%.
If you had followed transactions by non executive directors which were not accompanied by transactions by executive directors, then the shares you would have bought or sold would have outperformed the market by 9%.
These performance numbers relate to the share performance of the companies compared to the relevant index, and over the ‘holding period’, which may be from my comment to now, or earlier if I ‘closed’ the ‘view’.
The holding period amounts to very roughly 200 days, so these numbers are very significant on an annualised basis.
What about the number of directors transacting, does share performance have any correlation there?
Yes it does, a positive one. The greater the number of executive directors transacting at any time, the worse the performance. Conversely the greater the number of non execs, the better their performance.
I’ve weighted the share performance results with the number of directors transacting. The executive directors performance deteriorates by around a further 4 percentage points, and the non execs improves by a similar amount, calculated on a ‘per director’ basis.
Is this a suprise?
No, I suggested a divergence in performance of directors and non executive directors when I started this analysis 14 months ago.
Non execs have a much better understanding of the environment in which the company operates, and also of the valuation of the company shares, as they are able to ‘stand back’ and better analyse the environment.
Executive director share signals are clouded by disposals for tax, or buying shares to qualify for the incentive scheme. But they also have their noses to the grindstone, and therefore are less able to observe what is happening around them, to both their firms competitive position but also to stock market perceptions of their company’s shares.
This might also explain why so many executive directors bought into what they thought were cheap bank shares over the last 12 months. See Nils Pratleys article ‘Bankers lead way through the trap door’, which discusses this blinkered approach, and gives LTCM, Barclays and Yell as examples.
Is this a common phenomenon, or just apparent in bear markets. I don’t know. Most commentators, researchers, experts point to those with the most information, the CEOs, CFOs, making the best decisions. It may be that in recessions and bear markets, the individuals with a greater awareness are the non execs not the executive directors.
Time will tell.
If you require any further information, or would like to discuss these findings, please email me at followthedirectors@gmail.com, and I’ll get back to you.
If you manage institutional equities or hedge funds, then I am happy to provide a service analysing your equity portfolio on a regular basis.
Regards
Simon Winfield
http://followthedirectors.co.uk
followthedirectors@gmail.com
Mr Howard Covington
Chief Executive
New Star Asset Management Ltd
1 Knightsbridge Green
London
SW1X 7NE
4th December 2008
Dear Mr Covington,
I’m at a loss to understand several actions of New Star Asset Management Ltd’s management over the last 18 months. Namely the following:
1. Why did New Star leverage the balance sheet through a cash distribution of GBP 363 million, resulting in greater risk for shareholders, when your own leading indicator pointed to increased risk of an economic slowdown or even a recession?
‘..New Star’s leading indicator of global monetary conditions turning negative. This indicator ……has turned negative before the 10 downswings within the G7 since 1965- either economic growth slowdowns or full-blown recessions’ (John Jay- Director, New Star Asset Management, Newsletter ‘Investment Star January 2007’).
2. Why did New Stars directors not address the cost issue earlier, in view of the concerns over corporate indebtedness expressed by your own fund managers?
Jamie Allsop, Hidden value Fund Manager: ‘Companies with high levels of debt or leverage are going to find it difficult as interest rates rise further’
Richard Lewis, New Star European Leaders Fund Manager: ‘Higher bond yields and tightening credit markets are posing a challenge to financials and highly indebted companies, and the fund has being avoiding them’.
Theodora Zemek, Fixed Interest Fund Manager:‘The fund … was structured to reflect awareness that the economic cycle was maturing. Positions were, therefore, taken in more senior bonds issued by companies with reliable earnings and balance sheets that were not aggressively leveraged’. (All quotes are from the July 2007 New Star newsletter ‘Investment Star July 2007’)
3. Why did New Star Management fail to explain to shareholders the risks to the business of falling revenues and a high level of debt? The issue of a high level of debt within the business wasn’t highlighted by management until November 14th.
29th August 2008 John Duffield, Chairman, says in the Interim Results to June 30th:
“As expected, the first half of 2008 was a difficult period for New Star. The trading environment remains difficult and we do not expect conditions to improve in the immediate future.
“We remain confident that through a combination of investment performance, marketing and service we can return over the medium term to generating significant value for our shareholders. We believe the long-term outlook for our company is good.” [my bold]
No comment on debt at New Star except this: ‘As we signalled in January, we intend to continue using our cashflow principally to reduce further our net debt, which had been reduced to £241 million by the end of June.’ (Source- Company website)
14th November 2008. Interim Management Statement [debt issue moves up the agenda]
‘New Star has agreed with its bank syndicate that the financial covenants in respect of its debt should be amended to better accommodate the current unsettled trading environment. This amendment has immediate effect. As a consequence of the amendment the interest rate on New Star’s debt has increased by 1.5%. The debt remains repayable in a single payment in June 2013. New Star has not at any time been in breach of its financial covenants.’
‘Our banks understand our position and are supportive.'( Source- Company website)
21st November 2008. Company announcement on Reorganisation [only a week after Interim Management Statement debt issue now top of the agenda]
‘We announced in our interim management statement that we had successfully negotiated with our banks to amend our banking covenants. This was an important and positive step forward for our company. Following that announcement we are moving swiftly to restructure our fund management activities in response to the bear market and to specific areas of underperformance’. [this relates to fund performance, not something that can be changed overnight, but will take months and years to resurrect]
3rd December 2008. Company announces Capital Restructuring
‘New Star announces a proposed Restructuring that will result in £240 million of its £260 million of gross debt being converted into equity .
New Star currently has £30 million of cash so that, if the Restructuring were effective today, New Star would be left with net cash.
New Star’s bank syndicate will own 75% of New Star’s enlarged fully diluted ordinary share capital and £94 million out of £100 million of new convertible redeemable preference shares to be issued by New Star.
New Star intends to de-list as part of the Restructuring’ [sorry shareholders, you’ve been screwed]
4. Mr Covington, why on September 9th 2008 did you sell 2 million shares at 100.6651p, more than 40% of your holding, leaving you with 2.8m shares (Source: London Stock Exchange, Digitallook). Do you think Mr Duffields statement of August 29th (above) was overly bullish, and not reflecting the true risks at New Star Asset Management?
I look forward to your response.
Regards,
Simon Winfield followthedirectors.co.ukDear 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
Directors Buying signalling market bottom?
I was surprised on Friday to see such a turnaround in directors sentiment ‘Directors ARE buying shares. Buys outnumber Sells 10 to 1’.
Data on Directors Dealings from Digitallook (site here) showed that over the month of October Directors Buys in the FT 350 companies outnumbered Directors Sells by almost 10:1.
This is a sharp change from data I ran on October 10th, which showed Buys and Sells at similar levels for the prior month.
Is this a turning point for the market? What is the precedent?
I used the Digitallook Screening Tools product to screen for Directors buys over GBP 50k, and sells over GBP 50k, and looked at the market turn in early 2003, when the FTSE rallied by 1/3rd in 12 months.
Through 2002 and 2003 Buys to Sells are in the ratio of between 1:1 and 2:1 for most of the month periods analysed. In August and September 2002 this jumped to 4:1 and 3:1 respectively, then fell back to 1 1/2:1 and 2:1 for the following two months.
In December 2002 the Buy to Sell ratio popped up to 5:1, and the market didn’t look back for 30%, rallying 900 points to 4500 over the next twelve months.
The ratio of Directors buys to sells dropped back in January, but was consistently in the 1.5:1 to 2:1 range for the subsequent six months.
Is it time to buy the market now? All I can say is that investors today have substantially less confidence in the information available with which to make investment decisions. With this information vacuum, I believe that Directors Dealings play a more substantial role in telling us what is going on inside companies.
UK Engineers. 30 Directors buying shares.
The market killed the UK Engineering stocks on news of dismal results and orders in the truck and autos sector, and also justified concern that expansion at mines and oilfields will be delayed, trimmed back, or pulled completely.
So it is with interest then that we’ve seen, over the last two weeks, a substantial number of directors buying shares in GKN, IMI, Weir, John Wood, Bodycote, Laird and Senior.
I don’t know much about these companies, but I do know they are often the world leaders in their product areas, that historically they have been pretty good at generating cash, and have also attracted bid attention in the recent past (Bodycote).
And I also know that the 30 directors who have bought shares know a lot more than me about the valuation of their businesses.
For all comments by followthedirectors over the last week on the companies mentioned above see here.
Misys CEO Buys $350k stake in Allscripts.
If you are a Misys investor you should ask your broker about Allscripts (MDRX). Is Allscripts a cheaper way to buy a faster growing portion (Medical) of Misys’ business?
CEO of Misys, Mike Lawrie seems to think that Allscripts is the way to go. He has invested $350k in the group (our comment here). Misys now own more than 50% of the company which has 60m shares outstanding. Bloomberg show a short position of 6m shares, so this could prove to be rather interesting in both the near and long term.
Carnival dividend cut.
I wondered how long the bad news would take to come out of Carnival, the cruise business. They have suspended their dividend, saving $1bn + a year.
In June and August the CEO and COO took $4.5m out of the company. CCL is down 23% since our comment of August 5th ‘Chilling out or downside risk’, underperforming the FTSE by 5%. I suspect we’ll see further negative comment on bookings over the next few months.
Disclosure: The author has positions in Misys, Weir, IMI, Senior, Laird, Bodycote, John Wood.
On October 14th I posted the following article ‘Are directors buying shares?’, prompted by your questions.
‘As at October 10th the number of companies in the FTSE 350 indicating net directors dealings over GBP 50k over the period I asked for (1, 3 and 12 months) were as follows: 1 month to October 10 2008: 26 companies showed net selling over a cumulative GBP 50k, and 32 companies showed net buying. 3 months to October 10th 2008: 58 companies showed net selling, and 54 companies net buying 12 months to October 10th 2008: 144 companies showed net selling, and 130 companies net buying.’
I’ve just run the Digitallook screen again, and find that over the past month, to today, companies in the FTSE 350 which exhibit cumulative director share dealing activity greater than GBP 50k are as follows:
6 companies show net selling, and 59 companies show net buying.
Over the past week, the screen shows 3 companies showing net selling, and 18 companies showing net buying.
This indicates that Buyers outnumber Sellers by between 6:1 and 10:1.
A very powerful signal that company directors think shares are cheap.
I guess valuation has something to do with it. The FTSE 100 is roughly 10% lower, and the FTSE 250 very roughly 20% lower over the one month period (compared to the one month to October 10th). Anecdotally most of the buying activity has occurred in FTSE 250 stocks.
For followthedirectors comments on companies exhibiting director buying activity click here (This is not a comprehensive list, but companies that we believe warrant comment).
For other general market commentary see Market Musings here.
For the excellent Digitallook screening tool go to Digitallook.com
