COMPANY REFS :: The Refs Guide - Directors' Share Dealings

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Selecting shares without its help is like trying to clap with one hand tied behind your back.

Directors' Share Dealings

The individual entry for each company in the Companies Volume draws attention with a plus or minus sign to directors’ dealings during the previous six months. In each monthly edition of the Tables Volume there is also a schedule of all significant directors’ share dealings during the preceding six months.

An August 1993 study by Smith New Court demonstrated that an investor can outperform the market by following directors’ dealings. There are a number of key points to consider when analysing directors’ dealings:-

Directors’ buying is a clearer signal than directors’ selling. Directors decide to sell shares for a variety of reasons, such as buying a new house, to meet a tax obligation or simply to maintain a high standard of living. When a director buys a share, he or she is expressing the belief that the company’s shares are a better investment than cash. The director also usually believes that the share is under-valued.

The exceptions are when a director buys qualification shares on appointment, buys shares to take up an option that is expiring or when a director with a major shareholding buys a further trivial number of shares to excite interest in the company.
There is no doubt that there is comfort in numbers. Three or more directors buying a significant number of shares is a far more powerful indicator than an isolated transaction.
Directors’ dealings need to be related to the number of shares already owned and the amount of money involved. The sale of 20,000 shares by a director owning one million shares worth £1 each is of no great significance. However, the sale of an entire shareholding of £20,000 worth of shares owned by a director can be a cause for alarm.
The identity of the buyer or seller of shares can be significant. The chairman, managing director or finance director are usually the three directors with the most intimate knowledge of a company’s affairs. The transactions of other directors can be meaningful, but they are a little less likely to have the full story.
There are, of course, close periods when directors cannot sell shares. It is useful to know when they are, but I do not regard proximity to them as a particularly meaningful indicator.

REFS has been designed to pick up and highlight all of these factors. The monthly individual company entry shows with a minus if any director has sold and with a plus if any has bought within the last six months. The figure before the plus or minus shows how many months ago the transaction took place.

Once alerted that there have been dealings, you should turn to the detailed list of director’s dealings during the last six months. The list shows the position of the director, the director’s residual shareholding after the sale or purchase and whether or not the transaction was linked to an option.

Chief Executive Officer Changes

Details are given in each monthly edition of the Tables Volume of all chief executive officer changes during the preceding twelve months. The wording is taken from press releases which have to be read with a pinch of salt. Sometimes they are completely genuine but, on other occasions retirement from ill health’ can mean ‘judged incompetent by common acclaim’ and ‘wishes to reduce his executive responsibilities’ is a polite way of saying ‘he has done enough damage to the company already’.

The key point is that a new chief executive can herald the complete transformation of a company, especially if the executive in question is someone of high repute and the company is known to be mismanaged. There are many well-known precedents for very sizeable share-price gains in the years following this kind of change of chief executive.

The other side of the coin is that an executive of acknowledged great ability may leave a company without someone of comparable ability to replace him.

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