Spread Betting – Director Dealings
Monitoring the activity of Directors’ transactions and ‘shrewd’ investors can also prove profitable for those without the resource to do their own analysis and research. As well as providing long and medium term stock investment ideas, short-term trading opportunities can also present themselves when the newspapers highlight or write up the story. Stake building can often lead to a subsequent takeover bid.
Savvy investors are always on the lookout for instances of directors buying or selling their own company shares. Strict rules governing this type of transaction are intended to prevent insiders from taking unfair advantage of their privileged position. But the fact remains that a member of the board will always know more about the company than anyone else, which is why some directors’ dealings can send very strong signals to the market.
Will Armitage, market commentator says directors’ dealings are always worth watching out for: ‘The board members know the intricacies of the business and if they are putting their money where their mouths are then it is often a good indicator.’
The announcement of a director increasing or reducing his stake in the company can very often result in an immediate jump in the share price. However, some scenarios are more significant than others and these can herald substantial price moves over an extended period of several weeks. One way to play these is via a spread bet. These are quick and easy to put in place and will give a geared exposure with the option of using a stop to protect on the downside. Providers also invariably have live, real-time news feeds on their platforms, which include all the directors’ dealings announcements.
One thing a lot of analysts and investors look for as an indicator of a company’s future performance is whether or not company directors are buying or selling shares in the company or if they are exercising share options.
Why would Directors of a Company want a Strong Share Price?
A couple of reasons as to why a company would want a strong share price.
-The CEO’s job is on the line if they don’t perform and raise stock prices. These days there is so much pressure to beat earnings each quarter that it in a way becomes the driver of CEO performance. Some would say that pressure got so great that with the lack of oversight it is the pressure which has caused many a CEO or CFO to be dishonest. That pressure comes from the owners of the company (shareholders) and the board.
– Want a strong share price so you can always keep an option of obtaining financing by issuing more shares if needed.
Anyway, most important to corporate management is that their jobs are on the line, and they work for shareholders who demand an adequate rate of return on their investment.
If those shareholders are not happy (and in the rare case that they have a cohesive voice), they can sack the management team. Typically what would occur is that a vulture capitalist will swoop in and buy up a large amount of voting shares of a poorly-performing stock, vote out the management team and replace it with one that they favor with the aim of realizing the company’s ‘true market value’
So, in the aim of self-preservation, companies care a lot about their share prices.
Director Dealings
Dealings by directors in the shares of their own company are subject to various requirements and restrictions. As far as investors are concerned the main points are that directors must disclose any interests in the shares of the company and must notify the company of any changes in those interests within five business days. The company then has until the end of the following day to notify the London Stock Exchange. Since 2003 these regulations have also applied to derivatives in the company’s securities such as options, CFDs and spread bets.
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Another particularly noteworthy point is that the directors are not allowed to deal during the close period. This means that transactions either just before or after this can carry extra significance. The close period itself covers the weeks leading up to the publication of the annual or half half-yearly results. It runs from the end of the financial period to the date that the accounts are published, unless this is longer than two months, whereupon it is restricted to the immediate two months prior to the release of the figures.
What to Look For
Buying among directors is generally seen as being more transparent since sales could come about for a variety of personal reasons that are totally unrelated to the company’s prospects. The exception is if the board is selling en masse, which is normally a sure sign to get out quickly.
Directors’ dealings can provide a useful signal but investors need to be careful about the sort of company they are looking at: ‘One of the big FTSE 100 stocks with lots of directors could routinely see a high level of trading across the board. The more interesting opportunities tend to be the FTSE250 stocks or smaller caps where someone like the MD is trading.’
The blue chips are not totally devoid of interest, however, with M&S a case in point. The company has seen a spate of directors’ deals, with the most recent being John Keenan buying 50,000 shares on 20 September. This followed hard on the heels of two directors buying 100,000 shares at 347p on 13 September and three directors buying 120,000 at 356p a couple of weeks earlier.
These deals have added weight to rumours of improved trading at the retailer and may have contributed to the heavier than usual trading volume experienced in late September. At the time of writing the news had helped to lift the shares to 373p.
With all directors’ deals it is important to remember that there are vested interests at work so investors need to try and read between the lines to identify the best trades. For example, directors often buy when the price is depressed as a sign of confidence in the company. They are also loath to sell at such times.
The difficulty is trying to gauge if the board is simply trying to send a signal to the market or whether the members genuinely believe the price has fallen too far. It is also worth bearing in mind that directors do not always get it right.
Note: The more you study companies and are involved in this game the more you realise there are plenty of scammers, who may even be directors or a chairman. I still cast the occasional eye on HAWK, well someone should be behind bars for what’s gone on there, but not even an investigation has ensued – instead they go on to start up other companies. Likewise a company like Lamprell Plc has all the hallmarks of terrible management, director sells before profit warnings and end of the day RNS’s with useless excuses. However, the authorities rarely, if ever raise an eyebrow!
Size Matters
Perhaps the most important point to consider is the size of the trade, since the more a director is willing to invest, the greater the confidence it displays. Large deals are even more significant when they take place immediately either side of the close period.
A fairly old case in point involved Investec, the investment and private banking group. On 7 September 2004 two directors invested around £1 million buying over 104,000 shares at £10.25. This took their combined holding to almost 500,000 shares. The deal was significant for two reasons. First the sheer size of the investment, both in absolute terms and relative to their existing holdings, and second the timing.
The company published its results for the six months to 30 September 2004 on 25 November so the purchase took place just a few weeks before the start of the close period. When the figures actually came out a couple of months later the numbers were excellent with operating income and pre-tax profits both substantially higher. This helped the share price to rally and by the end of 2004 it was trading at just under £17.
Who, Why and When
Timing and magnitude were again the main reasons for investors to take note of a deal involving the shares of Tribal Group (TRB). On 11 July two directors of the consultancy and professional services company between them bought over 200,000 shares to take their combined holding to around 230,000. The timing was significant because it was just after the end of the close period, the results for the year ended 31 March having just been released on 21 June. By September the shares had risen well above the 136p purchase price to consistently trade in excess of 210p.
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