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Directors share performances

We’ve analysed the share performance of all transactions commented on on this website.

That totals  comments on more than 100 company transactions, and over 350 transactions by individual directors, both executive and non exec, from November 2007 to February 2009.

If you had followed transactions by executive directors, where they were not accompanied by transactions by non execs, then the companies you would have bought or sold would have underperformed the market by 6%.

If you had followed transactions by non executive directors which were not accompanied by transactions by executive directors, then the shares you would have bought or sold would have outperformed the market by 9%.

These performance numbers relate to the share performance of the companies compared to the relevant index, and over the ‘holding period’, which may be from my comment to now, or earlier if I ‘closed’ the ‘view’.

The holding period amounts to very roughly 200 days, so these numbers are very significant on an annualised basis.

What about the number of directors transacting, does share performance have any correlation there?

Yes it does, a positive one. The greater the number of executive directors transacting at any time, the worse the performance. Conversely the greater the number of non execs, the better their performance.

I’ve weighted the share performance results with the number of directors transacting. The executive directors performance deteriorates by around a further 4 percentage points, and the non execs improves by a similar amount, calculated on a ‘per director’ basis.

Is this a suprise?

No, I suggested a divergence in performance of directors and non executive directors when I started this analysis 14 months ago.

Non execs have a much better understanding of the environment in which the company operates, and also of the valuation of the company shares, as they are able to ‘stand back’ and better analyse the environment.

Executive director share signals are clouded by disposals for tax, or buying shares to qualify for the incentive scheme. But they also have their noses to the grindstone, and therefore are less able to observe what is happening around them, to both their firms competitive position but also to stock market perceptions of their company’s shares.

This might also explain why so many executive directors bought into what they thought were cheap bank shares over the last 12 months. See Nils Pratleys article ‘Bankers lead way through the trap door’, which discusses this blinkered approach, and gives LTCM, Barclays and Yell as examples.

Is this a common phenomenon, or just apparent in bear markets. I don’t know. Most commentators, researchers, experts point to those with the most information, the CEOs, CFOs, making the best decisions. It may be that in recessions and bear markets, the individuals with a greater awareness are the non execs not the executive directors.

Time will tell.

If you require any further information, or would like to discuss these findings, please email me at followthedirectors@gmail.com, and I’ll get back to you.

If you manage institutional equities or hedge funds, then I am happy to provide a service analysing your equity portfolio on a regular basis.

Regards

Simon Winfield

http://followthedirectors.co.uk

followthedirectors@gmail.com

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On October 14th I posted the following article ‘Are directors buying shares?’, prompted by your questions.

‘As at October 10th the number of companies in the FTSE 350 indicating net directors dealings over GBP 50k over the period I asked for (1, 3 and 12 months) were as follows:
1 month to October 10 2008:
26 companies showed net selling over a cumulative GBP 50k, and 32 companies showed net buying.
3 months to October 10th 2008:
58 companies showed net selling, and 54 companies net buying
12 months to October 10th 2008:
144 companies showed net selling, and 130 companies net buying.’

 

I’ve just run the Digitallook screen again, and find that over the past month, to today, companies in the FTSE 350 which exhibit cumulative director share dealing activity greater than GBP 50k are as follows:

6 companies show net selling, and 59 companies show net buying.

Over the past week, the screen shows 3 companies showing net selling, and 18 companies showing net buying.

This indicates that Buyers outnumber Sellers by between 6:1 and 10:1.

A very powerful signal that company directors think shares are cheap.

I guess valuation has something to do with it. The FTSE 100 is roughly 10% lower, and the FTSE 250 very roughly 20% lower over the one month period (compared to the one month to October 10th). Anecdotally most of the buying activity has occurred in FTSE 250 stocks.

For followthedirectors comments on companies exhibiting director buying activity click here (This is not a comprehensive list, but companies that we believe warrant comment).

For other general market commentary see Market Musings here.

For the excellent Digitallook screening tool go to Digitallook.com

I’m back from a weeks camping holiday with the family to find a whole load of share dealings by UK directors, but nothing hugely inspiring. Most of the ‘regulatory news reports’ issued by companies relate to directors exercising options granted as part of their pay, and selling sufficient shares to raise cash with which to pay the tax man.

In the case of AMEC (AMEC, 752p) I find that CFO Stuart Siddall exercised options on 200,000 shares, and sold them all (April 4th 2008). He has done this before, so this isn’t a change in behaviour. He owns now only 30,000 shares in AMEC, maybe more if you count share awards in the pipeline as options still to be exercised and realised. Maybe he is just a conservative investor.

Now lets look at Samir Brikho, appointed CEO in October 2006. He has about 1m shares in the pipeline, in the ‘Performance Share Plan 2006 and 2002’. Yet he has been buying more. On the 7th April he bought 16,000 shares at 718p, and on the 24th April 50,000 shares at 742p, taking him to 182,000 shares (excluding the unexercised options or shares mentioned above).

Is this significant? I’d say yes. Brikho has spent £483,000 and increased his position in AMEC by 50%.

The caveat on this call is that I don’t have a share transaction track record to look back at, and also that share ownership by the directors of AMEC is currently pretty limited in the number of directors (only 3). But I suspect that is about to change.

A mail from John Mauldin has just hit my inbox. He picks up on a comment by Soc Gen showing that analysts are always behind the curve when it comes to earnings forecasts (did you know this?). He goes on to conclude that the likely fall in company earnings this recession is nowhere near being discounted by the share market (see http://www.frontlinethoughts.com/index.asp article ‘Asleep at the wheel’).

I’ve borrowed from the newsletter an interesting slide summarising a recent Duke University CFO survey which strengthens my argument for watching directors behaviour, in preference to listening to what they say. Notably that

..CFOs are around 57% optimistic about the economy…., but are 68% optimistic about the outlook for their own firms!’

Duke University CFO Survey

There’s a plethora of information about directors share dealings in Cairn Energy ( CNE, 2915p) last week.

If you filter out the sales by executive directors of shares released under the Long Term Incentive Plan, and eliminate shareholdings sold and bought back before CGT changes, you are left with four notable changes in holdings:

1. CEO Sir Bill Gammall has sold 50,000 shares taking his holding to 377,000 shares.

2. Exploration Director Dr Mike Watts sold 40,000 shares taking his holding to 160,000 shares.

In my mind both of the above sales are interesting but not hugely significant.

Of greater interest are the sales by Non Executive Directors as follows:

Norman Murray- Cairn Energy Chairman

3. Non executive Chairman Norman Murray halves his holding by selling 40,000 shares at £28.61, releasing £1.1m, and

4. Non executive Director Todd Hart reduces his holding by more than a third, selling 10,000 shares to leave him with 18,000.

I believe these sales to be significant, both in value terms, and as a proportion of the directors’ position (holding) in Cairn prior to the sales.

Source: http://www.Digitallook.com

My name is Simon Winfield, and I have worked in leading investment banks in London and New York over the last 25 years, marketing investment ideas to the worlds top institutional investment managers and hedge funds.

Over the years I have met with senior management of hundreds of UK and European companies. I found managements’ body language and what companies didn’t say to investors to be far more valuable than what they did say, and I learnt to take the corporate spiel with a large pinch of salt.

Directors personal share dealings cut through the talk. I see them as a sign of what management really think of the opportunities and risks their company faces, as well as the current and potential company valuation.

In looking at directors dealings I ignore all the ‘incentive plan’ deals, where the company matches what you buy. Why wouldn’t you buy stock if you’re getting it half price? I ignore all the options exercising too, as this is usually seen by directors as pay which needs to be turned into cash.

Anything I write here is my personal opinion, and is not a recommendation to buy or sell shares, just my commentary on activity in the market.

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