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A director share trade is not always a signal for you to trade– ref Interquest, Volex & Quindell

By Tom Winnifrith | Sunday 29 March 2015

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

The conventional wisdom is that you should follow the “insiders” that is the board in terms of buying and selling shares. Sometimes the conventional wisdom is wrong. We can start with buys.

A director share buy is only significant if it is truly material in terms of the net wealth and salary of that director.  Looking at many director buys I almost think they are tantamount to market abuse. They are not material and their sole aim appears to be to support the share price. One might refer to the serial Quindell (QPP) buys announced a day at a time after Gotham as a case in point. This was nothing more than an exercise in PR – the willingness of any of those buying back in April 2014 to subsequently dump all their shares at far lower prices clearly demonstrates that.

Perhaps even worse are those directors who buy trivial amounts of shares at xp in the market when they could be buying at 90% of xp in a placing and open offer that is underway.  They are clearly taking a decision which is not in their own personal interests with the deliberate intention of spoofing investors into pushing the share price so ensuring the success of the placing. For the avoidance of doubt buying shares with the express intention of moving a share price is clearly market abuse and I am amazed that the FCA has not addressed this matter already. Sinners in this manner include Volex (VLX). Actually I am not that amazed, this is the FCA we are talking about after all.

What about a share sale. Generally I would agree that a sale is not a good sign. However, you cannot “take it with you” and the decision of one member of a board to sell is not an automatic red flag. But it is something that merits an investigation at least if you are invested.

For instance, two weeks ago, it was announced that the FD at InterQuest (ITQ) Michael Joyce – a good chap – had sold all of the 313,333 shares he had in the company at 91p. Panic stations? No.

Joyce has not sold a single share in 11 years until that trade and needs the cash for a housing transaction. Off the back of very strong results and an upbeat 2015 trading statement the shares look cheap at 89p-94p to me. The director share sale may have un-nerved some but I view that as an opportunity to buy at up to 105p.

So what to conclude? Blind following of director share trades is a mistake. Indeed if a company announces a series of immaterial director buys that is almost a sell signal. A director share sale of a material nature merits investigation. Unless there is a clear stated reason which holds water and unless the fundamentals look very good indeed I would treat it as a Red Flag – not in itself a reason to sell but a reason to check out of there are other Red Flags which justify bailing out.




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