Thursday, 28 June 2012

Insider Selling: Beware

A lot of investors ignore insider selling, that is selling of shares by directors. Of course sometimes directors will sell shares in their own companies but when the selling is significant I am always wary to invest. Afterall these are the people who know more about the business than any analysts do. If the directors don't have confidence in their own businesses then why should you? Insider selling can also be a good signal that not all is right in the company. Especially with companies that look cheap we have to be extra careful. If our valuation of the company makes it look a very attractive investment and the directors are running for the hills then there is a good chance that there is something wrong with the company that is not apparent in the fundamentals. If the company looks expensive by our valuation and the directors are selling then they might just be cashing in some chips and investing in something they see as giving higher returns (eg property).

Recently I posted a list of FTSE 100 individual stocks with their expected returns.

Using data from I have complied a table of the top 10 of the list (the best value shares) showing director buying and selling in the last 12 months together with the net buying or selling:

Share Buying Selling Total
BT £42,820 £5,220,072 -£5,177,252
Vodafone £21,143 £2,630,559 -£2,609,416
Legal & General £25,734 £2,233,156 -£2,207,422
RSA £1,198 £2,059,133 -£2,057,935
Aviva £246,018 £984,375 -£738,357
Scot & South Energy £624 £196,742 -£196,118
BAE Systems £594,138 £613,126 -£18,988
Resolution £0 £0 £0
ICAP £78,825 £49,613 £29,212
Standard Life £193,258 £137,272 £55,986

I've ranked the shares in order of net selling.

Looking at the top 4 in the list they all have insider net selling of over GBP2m and in the case of BT over GBP5m has been offloaded. In these cases I'd be cautious.

For Aviva there is fairly significant net selling but their has also been fairly substantial buying over the last 12 months too.

For the other companies on the list the amounts are low enough to be insignificant. In the case of BAE Systems the selling took place at the beginning of the period and the buying back of shares is more recent. If you changed the time frame to the last 6 months there would be a fairly substantial amount of net buying.

No comments:

Post a Comment