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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.

I’m not talking about the big cap FTSE 100 stocks here, but smaller FTSE 250 companies that are the global leaders in their field of specialty engineering.

Many of these companies have grown from a UK engineering base to have globally spread customers. They may also be companies with less near term economic exposure, protected by longer lead times, and also big beneficiaries of a weak Sterling.

It is unusual to see so many companies in one sector showing directors purchases, most of which have occurred in the last ten days. The directors clearly think trading conditions are better than those indicated by the share valuations in the stockmarket.

Weir Group (WEIR, 295p) : Three directors have invested GBP 350k in last two months.

Provider of engineering solutions (pumps, valves, pipelines, maintenance etc) to the mining, oil and gas, and power generation markets worldwide.

10x Half year 2008 operating cash flow. GBP 620m mkt cap.

Senior plc (SNR, 42.5p): : Six directors have invested GBP 70k in last two months.

Senior designs, manufactures and markets high technology components and systems for the principal original equipment producers in the worldwide civil aerospace, defence, diesel engine, exhaust system and energy markets.

6.8x Half year 2008 free cash flow. GBP 170m mkt cap.

IMI plc (IMI, 269p) : Three directors have invested around GBP 80k in last two months. 

IMI is an international engineering company, which operates primarily in the fluid controls and retail dispense areas. Fluid controls covers pneumatics, severe service valves and indoor climate products and services, while retail dispense includes beverage dispense and merchandising systems.
13.4x Half year 2008 operating cash flow. GBP 860m mkt cap.
John Wood Group plc (WG., 179p) : Four directors have invested over GBP 1m in the last week.
The international energy services company provides the oil and gas and power generation industries with engineering design, production support and industrial gas turbine services.
10.7x Half year  2008 operating cash flow. GBP 950m mkt cap (in FTSE 100, not FTSE 250).
Bodycote plc (BOY, 122p): Five directors have invested GBP 400,000 in last two months.
‘Bodycote is the world’s largest and most respected provider of testing and thermal processing services: Heat Treating, Hot Isostatic Pressing, Metallurgical Coatings and Testing – operating in 30 countries’ (strategy page on co website).

13.8x First half 2008 operating cash flow. GBP 400m mkt cap.

Read ‘Can Sulzer come back and bid for Bodycote? Ask the directors’  published at followthedirectors October 28th 2008.

Laird plc (LRD, 153p): Four directors have invested around GBP 70k in the last week.

Laird plc‘provide technology for an increasingly connected world’ in the form of  Electronic Components and Antennae enabling wireless connectivity (see co website for the lowdown).

10x First half 2008 operating cash flow. GBP 280m mkt cap.

Read: ‘Confident Laird directors delve into their pockets’ October 28th 2008 followthedirectors.

 

Disclosure: I have positions in Bodycote and Laird

Information sources: Company websites and London Stock Exchange.

‘Bodycote (BOY, 118p) is the world’s largest and most respected provider of testing and thermal processing services: Heat Treating, Hot Isostatic Pressing, Metallurgical Coatings and Testing – operating in 30 countries’ (strategy page on co website).

Four directors have bought shares in the last two months, and the CEO has exercised options over 148,000 shares (at a premium to todays price).

Between them and a PDMR they have bought around 132,000 shares in the market, and 148,000 shares via the options (CEO), investing over GBP 400k. Purchases and options exercises have been made between 114.88p and 206p over September and October 2008 (source: London Stock Exchange Market News website, type in BOY for all Bodycote news)

Why?

April 2007: Bodycote rejects fourth takeover bid from Sulzer (Times 20th April 2007) (stock reached high of 325p in March 2007)

October 2008: Bodycote announces completion of sale of Testing business for GBP 417m (October 17th 2008, company website)

Today: Bodycote shares now trading at 118p and have a market cap of GBP 380m.

Do you think Sulzer might come back for Bodycote? I don’t know Sulzers strategy or their financial position. Maybe you should ask somebody that does. But the directors clearly believe, as shown by their actions, that Bodycote shares are cheap.

View on Bodycote: Positive- Directors buying

Strength of Signal: Very STRONG. 5 out of 6 directors buying shares, significant $$ investment, company has a history of bid activity.

See also ’25 directors buy shares in UK engineering companies’ (October 28th followthedirectors.co.uk)

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