Watching the Company Directors

May provide a value investing opportunity!

Watching the company directors is a strategy that can be used in combination with value investing.

It works on the principle that if directors of a company are currently buying their own company stock, it is an indication that the company’s performance (and stock price) is likely to improve down the track.

If anyone should know about the state of health of a company then it should be the people on the board of the company ... or certainly one would expect so.

The action of directors can be then used with other information at hand to form a view as to whether their lead should be followed.

But where do you get information about directors' activity from? I get it from my online broker's website.

Companies are required to announce any changes in the holdings of their directors. The information should also be available from the website of the relevant stock exchange, as that is who the company reports to.

Unfortunately, like most things in life, it is not always that simple. There may be other reasons why directors are picking up shares, such as converting options that they have been assigned as part of their role, or re-investing their dividends though a dividend re-investment plan (DRP).

So I look for large purchases by directors that generally can be distinguished from smaller allotments of shares provided as part of their role, or through a DRP.

But of course, some large purchases by directors may be financed by a margin loan. This may put the company at risk if the share price of the company drops and short sellers drive the price of its shares further down.

This may then force the company director to sell shares to meet a margin call from the lending agency.

The end result may be, as in the recent past, that the company is forced into receivership with shareholders ending up losing all their investment in the company.

I would not expect that the best CEOs would act to put the company at risk.

The opposite case is where directors are selling significant quantities of shares in the company.

In this case it is difficult to know whether they are cashing in some shares to fund the purchase of a yacht, or their next overseas trip. Or whether they have real concerns about the company performance into the future.


In Summary ...

I only consider the buying activity of company directors (if it is happening) as one aspect of a potential share purchase, and use it in conjunction with other value investing criteria relating to the company.

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