19 March 2015

While quarterly financial updates provide much information about a company’s operational and financial performance, they are seldom written for the retail investor, rather for city analysts paid and experienced in deciphering the coded messages contained within and who have  the opportunity to regularly question top-tier management.

Based on the understanding that shares typically rise when results/outlook are better then expected and fall when the opposite is true, technically all investors need to be able to do is predict strong growth or an improved outlook in order to benefit from share price rises. Simple! However, how can one do this from one’s armchair? By watching for certain signals.

1. We mentioned analysts having access to management, therefore increases to consensus expectations or ratings can serve as an early warning that the company’s message is better, things are on the up and a re-rating due.
2. Share price out-performance versus the market can imply people buying into a new/updated story ahead of the masses
3. Sector peers’ shares outperforming after their own financial results can serve as a positive read-across
4. Company directors dealing (buying/selling patterns) via regulatory updates

While the first three are helpful, they are far from infallible. However, the latter can be a great signal given that directors know the business inside out but are only permitted to buy and sell outside of ‘closed periods’ (around results) and are required to abide by regulatory rules on insider trading whilst in possession of sensitive information (M&A, deals). When they buy in the run-up to results it implies they may be good. If they are selling, it could be that a disappointment is on the cards.

A few things to bear in mind before scouring all the LSE’s Directors Dealing announcements of your favorite companies;

1. Buying can be more meaningful than selling. The former ties money up and suggests belief shares are undervalued. The latter can be because he believes shares are overvalued but also for myriad personal reasons such as divorce.
2. Focusing on individual dealings can be dangerous. Identifying several buyers/sellers is probably safer.
3. Transactions by top dogs (CEO, CFO etc) can be powerful messages as they [should] really know what’s going on.
4. The size of a transaction versus existing holdings says a lot. Just adding a handful, or doubling up?
5. Beware purchases linked to maturing options schemes where shares are bought at a big discount.
6. Both executive and non-executive directors dealings can offer valuable messages.
7. Watch for directors/executives buying in concert purely to fly the company flag when things are difficult.

So while you might think you have to wait for the quarterly updates to decide whether to buy more shares, it could be that you need to focus on the gaps between results and the actions of the people in the know to provide you with the subtle hints as to the prospects for your favorite shares. Keep an eye on directors dealing. Good luck!

Mike van Dulken, Head of Research