New & Reviews
The meaning behind directors' transactions
14/11/2008
- Category: FEATURE
On average, directors are no better at a predicting stock price movements than the average investor. But when you filter for large transactions by multiple directors, some interesting trends emerge.
In theory, directors should know more about their company than anyone else. Directors buying or selling their own stock, therefore, should be a good predictor of future stock price movements.
That’s the theory anyway. The chart below, showing A.B.C. Learning’s Eddie Groves’s transactions over the past three years is an immediate challenge to it. Is Groves an exception that proves the rule, or evidence that there is nothing to be gained from following directors’ share purchases?
In a previous article titled Director’s trades show the inside track, we recommended looking at the size of the transaction, the number of directors acting in the same fashion, and whether there was any other reason for the director needing the cash (in the case of sales) as a more discretionary guide to directors’ trades. Having now examined more than three years of Directors’ Transactions data, we’re in a position to draw some more substantial conclusions.
This is how we approached the exercise. First we filtered the transactions for those where greater than 10% of the director’s original holding was bought or sold. Then we calculated an annualised return from the shares from when the transaction was made to 23 October 2008.
We found that both buyers and sellers experienced an annualised return of –32%, meaning that those directors that sold effectively gained 32% pa from not suffering a loss on the shares they sold, whilst directors that bought suffered a fall of the same amount. From this we might conclude that directors are no better at predicting future stock price movements than any other investor and that they should be ignored. But we’d be wrong.
Size matters
As it turns out, the larger the value of the transaction, the more likely it is to predict future stock price movements. After eliminating all transactions with a value of less than $500,000 and looking at a range of minimum values up to $4,000,000 we were able to compare the average annualised returns of the shares of large director share transactions. The results can be seen below.
As the minimum value of the transactions increases, directors experienced improved annualised returns for both buys and sells. But those directors that bought shares experienced their returns increasing at a greater rate as the value of the transactions increased compared with those that sold their shares.
This suggests that directors buying shares with large amounts of their own money might be a better indicator of a company’s future prospects than when they sell. It certainly makes intuitive sense. Director selling is often driven by personal circumstances whereas purchases are presumably driven by a belief about the company’s future performance and its current value.
So despite the average director being no better at predicting share price movements than the average investor, the size of the transaction seems to offer some signals about future share price movements.
Some direct mishaps
| Director | Company | Value bought /(sold) ($m) | Price change since sale |
|---|---|---|---|
| Eddie Groves | A.B.C. Learning | 27.5 | -92% |
| David Coe | Allco Fin. Group | 0.9 | -98% |
| Wal King | Leighton Hldgs | (1.8) | 417% |
| Grant King | Origin Energy | (1.8) | 120% |
| Gary Pemberton | Billabong Int’l | (19.6) | -6% |
| Gary Levin | JB Hi-Fi | (0.4) | 142% |
| Richard Uechtritz | JB Hi-Fi | (5.5) | 152% |
Is it reliable though? Not as far as the directors listed in the adjacent table are concerned. Since Richard Uechtritz’s sale of $5.5m shares in JB Hi-fi in early 2006, for example, the company’s share price has more than doubled.
In order to draw more reliable conclusions about a particular buy or sell transaction one needs to consider the investing history of the director, their background and their area of expertise.
| Director | Company | Value sold ($m) | Prop. of holding | Change since sales |
|---|---|---|---|---|
| Ross Dobinson | Roc Oil company | 0.9 | 17% | -83% |
| Peter Higgins | Mortgage Choice | 25.5 | 54% | -65% |
| Ken Ambrecht | Fortescue Metals | 2.1 | 3% | -67% |
| Richard Uechtritz | JB Hi-fi | 19.1 | 41% | -21% |
| David Clarke | Macquarie Group | 24.2 | 34% | -53% |
| Kay Page | Harvey Norman | 16.1 | 15% | -54% |
| Andrew Bassat | Seek | 8.1 | 7% | -50% |
| Peter Gregg | Qantas | 2.1 | 38% | -22% |
| Myer Herszberg | Infomedia | 11.5 | 41% | -49% |
| Kerr Neilson | Platinum Asset Management | 33.4 | 1% | -55% |
What, then, can one conclude about Richard Uechtritz’s sale of more than 41% of his holding in JB Hi-Fi after a 61% increase in the company’s net profit? It’s hard to say. He has a history of ill-timed share sales but is better placed than anyone to judge the company’s potential future prosperity.
These examples illustrate that a director transaction is not in itself significant. But with context – director’s record, history, reasons for sale and its size – it may be.
Multiple directors, greater odds
When multiple directors buy or sell shares at the same time, our data suggests it is a very good time to reassess your holdings, especially if they are buying or selling large amounts.
Between October and December 2007, seven of the directors of Roc Oil sold a combined $4.7m in shares at an average price of $3.00 per share (see Roc Oil chart below). With six of these transactions occurring in the same week, this amounted to the sale of 15% of their combined holdings in the company.
A similar story can be told for Mortgage Choice where four of the directors sold a combined $71m dollars worth of shares – more than 27% of their combined holdings in the company – between late 2005 and early 2007 (see Mortgage Choice Directors send sell signal). Its share price has since fallen by more than 65%. This could, of course, be coincidence but it doesn’t look like it.
In general, then, it looks like directors are no better than the average investor at predicting future stock price movements. But if large parcels of stock are changing hands and more than one director is involved, it’s time to review your position. That doesn’t mean you need to follow suit but you should at least give it some thought.
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