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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.

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.

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