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Executive decisions – Vikki Kunz follows the bosses buying and selling
The general rule of thumb with regard to directors' dealings would seem to be thus: buy if they're buying and sell if they're selling. But watch out for the exceptions that prove the rule If you've been reading this column this year, you'll know that directors have been selling like crazy since the equity markets regained momentum. The exact extent of the selling is quite revealing. From June 2003 to June 2004, the total value of director shares sales topped £1.1 billion. By comparison – and it's a very interesting comparison – those buying shares shelled out a mere £418 million.
This will not come as much of a surprise to seasoned (cynical?) market watchers. After all, AIM has risen from its March 2003 low of just 542.4 points to the current 861.5 (and even touched 939.9 earlier this year). With these kind of gains, it's hard to begrudge directors for wanting to monetize their paper gains after enduring a dull, dreary and largely unprofitable bear market.
Follow the leaders
However, as well as not begrudging them their gains, in most instances, it's worth following their lead when they offload stock. Of the 17 directors' sells mentioned here in the past six months, 11 sold at the top of their share price curves. Typical players in the selling game were Professor J David Rhodes and John Samuels, chairman and finance director of electronic product designer and manufacturer Filtronic. They were particularly shrewd when selling 580,000 shares between them in February at a three- year high of 420p. Filtronic's shares are now trading at 302p, a 35.7 per cent drop.
The exception that proves the rule?
Of course, not every sell by a company boss has been inspired. A few months back, executive chairman Larry Tracey and deputy chairman James Peters, of power supply solutions provider XP Power, sold 155,000 and 100,000 shares respectively at 280p. These shares are now worth 381p each, a 36 per cent improvement, primarily because the company expects to exceed market expectations for the current year. The (probable) rationale for Tracey's and Peters' sale was the simple fact that the shares had been as low as 80p in the previous 12 months. They can, of course, still benefit from the recent gains as they still hold over 38 per cent of XP's issued share capital.
In for a penny, in for a pound
But selling is not the only smart decision to follow as a general rule of thumb. I picked up on five companies with directors buying shares and the bulk are already reaping the paper rewards.
All five directors of video product manufacturer IndigoVision spent a total of £174,193 on 436,000 shares in early February. Improved interim results in March and a licence agreement with a semiconductor design business in Taiwan worth at least $1.4 million (£764,000) hoisted the shares up 45 per cent to 56.5p.
Directors at recruitment services group BNB Resources shelled out £6 million at 12.5p per share in a £11 million placing to pay for the acquisition of Apollo in April. With the recruitment market now in an improved condition, the shares of BNB have risen 46 per cent to 18.25p. The directors must expect market conditions to improve further still as they are still snapping up shares.
A cautionary tale
Whenever directors do trade though, it's always worth checking the underlying performance of the business and any attendant reasons for them to deal. You may remember that last month I mentioned that Andrew Rickman, Giorgio Anania and Robert Rickman entered into a structured pre-arranged trading plan to sell 510,000 shares between them in Bookham Technology on the third day after each quarter's results. Valued at 121p in March, a set of bad results must have dismayed the boys as their shares were sold at 49p in May. But to add insult to the injury, a mere one month later the shares have already risen 19.4 per cent to 58.5p.
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