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We’ve found that non execs outperform execs by somewhere between 7% and 11% amongst the directors dealing transactions we have observed over the last 18 months. We are unsure as to whether this outperformance is a feature of bear markets, or will continue when share markets are rallying.

Our thesis when we started followthedirectors was that non execs would have a better ‘handle’ on both valuations and the competitive and economic environment due to their involvement in  activities outside the firm on whose board they sit.

A few transactions over the past week where only non execs have been buying shares are worth noting as follows:

Vodafone (VOD, 116p)

announced that on May 22nd that Sir John Bond, the group Chairman, bought 100,000 shares at 116p, taking his holding to 337,000. We looked back at recent history, and found another non exec, Luc Vandevelde, buying 32,500 shares at 120p on March 24th, taking his holding to 72,500 shares.

View on Vodafone : Positive                   Value of directors dealings signal: High/Strong

Eaga (EAGA, 127p)

saw two purchases ny non execs last week, namely Roger Ayland and Malcolm Simpson, who bought 50,000 and 8,000 shares respectively, at around 120p, taking their holdings in the energy efficiency company to 50,000 and 96,000 shares respectively.

View on Eaga : Positive                              Value of directors dealings signal : High/Strong

QinetiQ (QQ., 146p)

last week announced share purchases by non execs Nick Luff and David Lees. Luff bought 20,000 shares at 141p, taking his holding to 70,000 share, and David Lees bought 10,000 shares at just over 144p, taking his holding to 83,000 shares. Back on the 12th of March, the CEO Graham Love had bought 100,000 shares at 141p, pushing his shareholding to over 5 million shares.

Sir John Chisholm, the Executive Chairman, called the top on QinetiQ when he sold 1.5 million shares within 8p of the high, at 220p, on 27th August last year. 

View on QinetiQ: Positive                  Value of directors dealings signal: High/Strong

Eaga (EAGA, 112.5p), the UK heating system provider for social housing, has announced that the CEO and CFO are each selling 1.1m shares ‘to satisfy tax liabilities incurred at IPO which are due shortly, ……..and to provide an element of liquidity‘ (Company statement November 25th, source London Stock Exchange).

In April eaga directors bought shares, taking advantage of a depressed share price resulting from costs concerns primarily related to copper prices. This prompted us to look at eagas valuation, and its comparison with Connaught (CNT, 366p), a similar company, where directors had been selling shares.

Since April 30th ‘Connaught (directors selling) vs Eaga (directors buying)‘ Eaga are down 13.5%, the FTSE 250 index is down by over 40%, and Connaught are down 8.67%.

If the CEO and CFO are selling shares, then maybe we should also.

So we close our positive view on eaga with a 27% relative performance vs the FTSE 250, and a -5% relative performance vs Connaught.

View on eaga- Negative – directors selling shares.

Strength of signal- Medium

For all followthedirectors comments on eaga click here.

Share transactions:

John Clough CEO sold 1.1m shares at 110p taking his holding to 5.236m shares.

Ian McLeod CFO sold 1.1m shares at 110p taking his holding to 3.982m shares.

I want to recap here posts that I wrote last month, with the absolute and relative performance of shares to today. To see the original posts I am referring to, look for the title to the left of here, or type the company name into the ‘Search’ box.

April 3rd Diageo DGE 1055p NEGATIVE CALL -1.6% absolute, -7% relative

Negative call based on the news that CEO Walsh had sold £1m of shares, and upon reviewing his historical sales, found him to have excellent market timing.

April 7th Cairn Energy 2915p NEGATIVE CALL +5.4% absolute, +1% relative

Negative call on news that Non Exec Chairman had sold half his holding in Cairn

April 25th AMEC AMEC 752p POSITIVE CALL +9% absolute, +7% relative

Positive call on news that CEO Brikho had increased his position by 50%. buying £483k of shares

April 25th EAGA EAGA 135p POSITIVE CALL -13% absolute, -19% relative

Positive call based on directors buying in a vacuum of information or market knowledge on Eaga.

April 25th Galiform GFRM 71p POSITIVE CALL +18% absolute, +12% relative

Positive call based on intriguing market timing, namely CFO buying shares for the first time since joining the board in 2005, in an environment of negative news from the housebuilders.

April 30th Connaught CNT Eaga EAGA -4.5% relative

Switch suggestion (long term ‘2-3 sets of results’) from CNT into EAGA based on director selling in former, and buying in latter, as well as significant valuation differences

I commented the other day that I believed eaga (EAGA, 124p) to be unloved, unknown and out of favour, but with directors buying prompting a ‘look again’ signal for investors (see post here).

Then I see that two days ago, Mark Tincknell, the Executive Chairman of Connaught (CNT, 396p) had been selling down his position in his company. He has sold 2 1/4 million shares, almost a third of his position, at 375p, to leave him with 1.3 million shares.

There are a couple of quotes I find rather amusing in the press release, namely that he sold shares ‘to satisfy institutional demand’. Well somebody had to be on the other side of the trade didn’t they !!

And then the release goes on to state that Mr Tincknell is extremely positive about the future prospects of the company’. That may well be the case. But the fact that he is selling such a huge slug of his holding may also indicate that Mr Tincknell thinks that those future prospects are already discounted in the share price.

I know little of these companies save what I read on their websites. These lines are taken from their company overview pages:

Connaught: ‘Our Social Housing division has a community focus, fixing, maintaining and cleaning homes and neighbourhoods for local authorities and social landlords, and is one of the most highly respected players in the national social housing landscape. Our Compliance division specialises in gas, electric, water and fire compliance, and provides full health and safety and business risk assessments.’

eaga:A leading provider of residential energy efficiency measures for utility companies under the Energy Efficiency Commitment (EEC), and a large and rapidly growing supplier into the social housing sector.’

I see a similarity in customer bases, but with a slightly differing product.
Then I look at the financial data as provided by Digitallook.com.

Company: …………………………………………Connaught ……………eaga

Mkt cap £m ………………………………………485 ……………………..306

Turnover £m ……………………………………..400 …………………….482 (both last reported finl year)

Net cash flow from operating activities £m 9.75 …………………33 (both last reported finl year)

Share price ………………………………………. 396p …………………..124p

eps (last reported finl year/forecast) … 12.2p/17p ……………12.27p/10.6p

And I leave you to make your own conclusions. All I can add is that this would be a long term trade, as it will take 2+ sets of results by eaga to change investors opinions.

eaga (EAGA, 135p) is a little understood company. It is more than 51% owned by its employees and directors, is trading below it’s IPO price of 181p, and its activities encompass something investors have little experience in, namely working with social housing providers and utilities in the replacement of heating systems.

The shares recently ‘collapsed’ from 200p at the end of February, to 135p now, on the back of an interim report pointing to cost squeezes and demand delays.

In January all the executive directors bought stock, at around 150p. I ignored this signal because the size of the purchases relative to the existing holdings were at 1% irrelevant.

But Malcolm Simpson, a non executive director of eaga, then increased his holding by 45%, investing £38,000. Last week he invested a further £40,000 by buying 30,000 shares at 133p, taking him to 88,000 shares.

And this week Dave Routledge, an Executive Director, has invested £99,000, buying 75,000 shares at 132p. In the context of Mr Routledges pay (£231,000- source: annual report 2007), his investment of £200,000 since January should be seen as significant.

I believe that eaga shares are underheld and the company unknown by UK investment institutions, and that therefore the information on directors dealings as highlighted above is significant.

Also see April 30th post on eaga and Connaught here.

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