Company directors at some of the UK’s best-known firms returned from holiday in the mood to spend, buying up shares in their own businesses “at the fastest rate for four and a half years”, according to the Financial Mail, following the summer’s big sell-off. The scale was such that buyers outnumbered sellers by ten to one last week. Given that the directors should be best placed to spot a bargain, we ask if you can ditch analysis of company accounts, dispense with charting and simply copy them.
Director dealings: who’s been doing the buying?
Among the most prolific spenders were Sir Nigel Rudd, chairman of car dealership Pendragon, who invested £400,000 in his firm, and the CEO of Prudential, Mark Tucker, who spent £267,300. However, even these pale when set next to the £1.143m invested by Jon Aisbitt of hedge-fund operator Man Group, or the £1.124m spent by Bernard Cantor of Investec.
While at first glance the buying seems indiscriminate, when total deal volumes are ranked by company, financial services firms stand out from the crowd (see table below). Barclays and Man Group together accounted for around half of the top ten purchasers, with no fewer than six of the top ten biggest individual spenders working for Barclays.
Why buy now?
According to Merrill Lynch analyst Khuram Chaudhry, directors simply recognised an opportunity to buy shares in blue-chip UK companies on the cheap. The credit crunch hit nearly all share prices as general panic set in. At one stage in mid-August the FTSE 100 was trading nearly 10% below its peak earlier in the year and many large companies saw their p/e ratios sink to historically low levels of around, or even below, ten.
Are these director deals a reliable guide?
Directorsdeals.com argues that following the lead set by directors when they buy is much more reliable than when they sell. A company director’s motivation for dumping stock is as likely to be about freeing up cash to pay a tax bill or fund an expensive divorce settlement as about a desire to cash in before the share price falls. The website cites evidence that suggests average prices rose 23.5% between 1999 and 2003 following heavy buying by directors, whereas significant selling was followed by a drop of just 15.5%.
So should you follow their lead now?
Not necessarily. While in some instances following the lead of a director can be profitable, there are plenty of times when it would have lost you money. For example, as the FT reports, had you invested £1.4m in Barclays on 2 August, as ex-director Naguib Kheraj did, you would already be around £136,000 poorer. Had you followed the lead of the other Barclays directors collectively, you would be down around 10%. At the end of the day, as The Daily Telegraph put it, interpretation of directors’ deals “is more of an art than a science” and certainly should not replace a broader-based analysis of the company’s fundamentals and economic prospects.
This is particularly relevant when you consider the most popular sector among directors in recent weeks – financial services. They might be piling in now, but in the current climate of tighter credit and risk aversion there is plenty of scope for more downside among banks and hedge funds (who reported their worst performance in seven years last month). While purchases of the size seen recently are probably not what The Daily Telegraph has described in the past as a “cynical attempt to buttress support for the shares”, it’s worth remembering that these same directors clearly failed to foresee the end of the credit bonanza.
So maybe they don’t know their businesses as well as they should. As such, the most sensible approach is the one favoured by James Ridgewell of New Star, who uses directors’ deals as “an extra tick in the box”, rather than as a foolproof guide to when and what to buy.