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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.
Follow up on our HSBC call of October 12th:
Recent negative newsflow for HSBC (HSBA, 702p) is now mostly in the price.
‘The extent of the slowdown in the Chinese economy became clearer on Thursday when the government disclosed that the rate of increase of industrial production had dropped to the lowest level in seven years’ (Source- FT.com November 13th 2008).
The FT goes on to say ‘Four days after unveiling a massive fiscal stimulus programme, the government said that industrial production increased by 8.2 per cent in October – well below forecasts’.
I suspect that the market now knows much (if not all) of what the HSBC directors knew back in early October when they sold their shares (see followthedirectors comment of October 12th ‘ HSBC- Directors Sell- ‘Credit tightening’ now hitting China growth’).
In the four weeks since our October 12th comment, HSBC are down 10% while the FTSE 100 is up 9%.
For all our comments on HSBC click here.
In HSBC (HSBA, 790p) I see a strong, well managed, diversified global bank, with a higher exposure to the growth markets of Asia than its (now nationalised) compatriots on the London Stock Exchange.
I notice though the first significant signs of Chinese slowdown in the announcement on Thursday by Australia Iron Ore producer Mt Gibson (MGX, 71c) that their Chinese customers want to delay shipments.
In their statement (link to co website) Mt Gibson say ‘ Customer and iron ore sector analysis indicates a slow down in demand for iron ore in China due to current economic uncertainty and the tightening of credit facilities’.
Whose ‘credit facilities’ I wonder, the Chinese or their Western customers?
I also notice directors share sales at HSBC, wth a DD John, a ‘PDMR’ (senior manager but not group board member) selling 61434 shares at 907p on October 1st.
Reviewing other directors sales over the past twelve months I find sales taking place at between 766p and 884p between October 2007 and June 2008 totalling around 400,000 shares or GBP 4m. Directors who have sold include Hughes Hallett (non exec), Almeida (non exec), Green (Chairman), Flint (CFO), and Geoghahan (CEO). For full details go to www.digitallook.com or to the HSBC company website.
I wonder how long HSBC can weather the storm that banks in the rest of the world are currently embroiled in. I think the price levels at which share sales by six directors took place are a good indicator of a medium term peak level for HSBC shares.
Signal: Negative- Directors selling
Signal Strength: MEDIUM
October 17: Anecdotal information on the Chinese economy from a contact in Hong Kong:
Second largest Chinese port shows exports down 14% since July.
40% of the Chinese toy companies are now insolvent.
Also see: ‘Credit crisis casts gloom over China’s exporters’ (October 14th, Associated Press)
For subsequent comments on HSBC (November 10th and November 14th) see here.
Today FT.com reports on RBS: ‘ Sir Fred Goodwin, chief executive, said the bank had been “comparatively unaffected” by turbulence in world markets and the write-down because of credit market moves would be a net £950m in the second half. This is below the £1bn to £2bn range of expectations.’
On November 12th followthedirectors reported: ‘Strong message from RBS’. ‘Five non exec directors of Royal Bank of Scotland (RBS) last week bought shares at between 403p and 423p. They increased their shareholdings by a significant amount, by between 25 and 150%, and put in between £40k and £495k of their own money.
I went on to comment that ‘For a bank which is supposedly sitting on possible losses of several billion pounds this is certainly interesting behaviour. It also signals to me that the market has oversold RBS in anticipation of the disclosure of these losses.’
So, friends, did the market listen to the strong message that the RBS directors were sending? Mostly, yes.
The FTSE over that period is up from 6300 to 6500, a rise of 3%
Since my report on November 12th in the am, RBS are up from 402p open, or 406p where I bought them that morning, to 493p now, a rise of 21%.
And while I’m blowing my trumpet, in the same post I suggested a switch (or short position) out of Standard Chartered and HSBC into Barclays and RBS.
If you (or I for that matter) had done this, then your long positions would be up on average 19% (RBS 21%, Barc 17%) and your short positions up on average 8% (Stan 15%, HSBC 1%), a return of 11%. Go back to my post of November 12th for director dealing driven signals that prompted this suggested trade.
followthedirectors... a study of directors share dealings 