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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 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.