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Sell high, Buy low. That’s what I was taught.

This completely failed when in September I suggested that De La Rue (DLAR, 1001p) were ‘up with events’. The company declared a ‘strong order book’  and ‘operating cashflow remains strong’.

This resilience, coupled with a market meltdown in October, meant that investors were prepared to pay a premium for certainty of cashflow, hence De La Rue’s 48% outperformance against the market (September post ‘De La Rue CEO and CFO raise 1 million pounds’).

CFO Stephen King yesterday sold just under 30,000 shares at 1001p, taking his holding down to around 16,000 shares.

I’m of the belief that things can’t get any better for De La Rue, and continue my cautious stance. Also, take a look at Kings timing. He seems pretty good at taking advantage of the share spikes to optimise his share sales.

View on De la Rue: Negative

Strength of Signal: Remains STRONG

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.

Wow. Aren’t you exhausted? What a week that was. Thrilling too. You never knew what was going to come at you next!

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We’ve seen a few sells this week. Stocks worth noting for directors selling activity are Savills (SVS), De La Rue (DLAR), and Hargreaves Lansdown (HL.).

Savills (SVS) directors have been a pretty good signal for future share price performance, but the disclaimer must be ‘the past is no guide to the future, you can lose everything in the stock market’. On the positive side availability of capital should lead to some pick up in activity in real estate, on the negative side look at Savills huge cost base.

Hargreaves Lansdown (HL.) directors say ‘Volatility will impact profit growth’. CFO and Head of Accounting have been selling.

De La Rue (DLAR) CEO and CFO both sold this week, taking profits in a stock which is up 50% relative to the FTSE 250 index. Maybe the good news is all in the price.

On the buy side:

Shire (SHP) directors have been consistent buyers. They have a track record. And five of them are buying. Definitely worth a look.

New World Resources (NWS) fall of 50% in the last three weeks has prompted a number of directors to buy. This coal miner and coke producer is, of course, highly vulnerable to a slowdown in economic activity. The directors seem to be more confident than the stock market.

Heritage Oil (HOIL). We’ve seen a number of buyers in small oil companies over the last two to three weeks, including ROC, Arawak, Heritage, and Serica. This may signal a support level for the energy sector.

And what about Prudential (PRU)? Mark Tucker CEO invested GBP 100k on Monday 15th September at just shy of 500p. He bought 20,000 shares taking his holding to 1.5m shares. I don’t interprete this transaction to be a valuable signal as

  1.  
    1. Only Tucker is buying, no other directors, and
    2. This is a tiny increase in his existing holding. 

Granted, he is up 20% on GBP 100k in a week. Time will tell.

Enjoy the week ahead. Keep calm and think of the long term.

Just as the central banks are ramping up the printing presses, and De La Rue (DLAR, 948p) declare a ‘strong order book’ and ‘operating cashflow remains strong’  in their pre close statement on September 16th, the CEO Leo Quinn and CFO Stephen King reduce their holdings substantially.

The statement reads fairly positively, but the one thing missing is any comment on costs. Maybe those haven’t been added up yet. 

Stephen King, CFO, on September 18th sold 36907 shares at 920p, raising GBP 340k. These are the balance of the shares he exercised in July, having sold about 25,000 to pay the tax due. He is left with 46620 shares.

Leo Quinn, CEO, on September 19th sold 78500 shares at 948p, raising GBP 740k. This leaves him with 126,000 shares.

De la Rue looks to be ‘up with events’, having outperformed the FTSE 250 by 50% in the last year. I think King and Quinn might have a point here.

Value of directors dealings as a signal for investors: STRONG.

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