directors sells, page-23

Buddy, if you or others are concerned then sell. I'm not concerned. If I was, I would have sold weeks ago
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Directors sell shares for all sorts of reasons: to pay for a new house or perhaps to pay out an ex-wife in a costly divorce settlement.

What is never stated is that they're flogging shares because they reckon the stock is overvalued.

But that is the conclusion many observers might jump to when they see people from the boardroom disposing of hefty lines of stock.

What better way for sellers to dispel such bearish thoughts than to explain right up front that they sold to accommodate fund managers who badly wanted stock, or to help liquidity in the marketplace.

The latter was the reason proffered by David Stewart and Michael Boorne, two executive directors of NetComm, the designer and distributor of communications and networking devices such as ADSL modems.

Stewart sold 3 million shares at 30¢ apiece and Boorne cashed in 2 million shares at the same price.

NetComm shares have trebled in less than a year but that was not the reason the two directors sold some stock.

No, they reckoned that the shares were undervalued and had been for some time.

The undervaluation, they added, was due mainly to "a lack of liquidity in the stock."

Their 5 million shares were distributed to more than 40 clients of Shaw Stockbroking.

So how have the newcomers to the share register fared?

Well, not too bad at all. The 30¢ shares had within 48 hours jumped to 34¢ but have since lost a bit of ground, falling back to 32¢ in early trading yesterday. But in the final minutes of trade a good fairy pushed them up to 33.5¢ on very, very light turnover.

Elsewhere, Stanley Macdonald and Graham Riley, directors of Giralia Resources, sold 4.75 million and 2.25 million shares respectively at 21¢.

They sold the shares "following a request from a European-based institution and other overseas investors".

Ten trading days have passed since those enthusiastic offshore punters put up their money and the scrip still hasn't returned to 21¢.

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Directors' Transactions
The Intelligent Investor, 24/11/2003

You might think directors' share sales spell trouble. Not necessarily. And purchases are even more important.

Market observers keenly follow directors' transactions - the practice of a board member buying or selling shares in the company on whose board they sit.
The reasons for this are obvious: a director is likely to know more about the company for which they work than any analyst or investor. But it's not quite that simple, as this examination of the subject will indicate.
Imagine you're a company director with a 9% stake in a successful, growing business. The company has just reported an interim profit of $8.8m, more than double its interim profit of three years ago.

Strange
But over that period something strange has occurred. Three years ago nobody was particularly interested in your stock.
Now people are clamouring to acquire it, at a price five times higher than before, despite profits only doubling. What do you do?
You might sell part of your shareholding, as Walter Pahor, then managing director of 'green' energy business Energy Developments, did in May 2001. When faced with similar circumstances he sold 2m shares, reducing his stake to just over 5%. It didn't go down too well.
Indeed, when Matthew Perrin, the former managing director of Billabong International sold 8m shares last year, it cost him his job. Was 'the market' right to judge these two cases as warning signs of bad news to come?
Well, shares in Energy Developments have since fallen by about 80% and Pahor's timing looks most fortuitous. And Billabong is down more than 20% since Perrin bailed out of the surfwear company. So, at first glance, the presumption that directors selling is a warning sign rings true.

Why they sell
By itself, though, it is not necessarily cause for alarm. Investment guru Peter Lynch, author of One Up On Wall Street, says there are many reasons why directors sell.
They may need money to buy a new house, pay off a debt, or simply want to diversify their investments - this last reason was used by Pahor to justify his sale.
That's true. Directors, just like ordinary investors, may have very valid personal reasons for selling down their stake. At The Intelligent Investor we tend to look for some additional information to help us interpret the sales. Here are some warning signs to watch out for:
Be wary of director sales if the stock is expensive. Energy Developments and Billabong were extremely 'popular' stocks that had already risen substantially before director sales. Energy Developments had also taken advantage of its share price strength to raise $105m in new capital shortly before Pahor dumped stock.
Watch out for repeated selling by several directors. Ongoing sales by more than one individual suggest the future is less rosy than ordinary shareholders might expect. Where more than one director is selling, the case for getting out strengthens.
Beware of share sales associated with the departure of a managing director or chief financial officer. It may not surprise you to learn that Pahor had already announced his resignation as managing director prior to his decision to offload stock.

So what about director buying?
Well, Peter Lynch says it best - 'There's only one reason that directors buy: They think the stock price is undervalued and will eventually go up'. This is an important distinction. Directors sell for all sorts of reasons but they buy because they expect to make money.
So take note when respected directors buy with their ears pinned back, particularly if they already hold large stakes. Gerry Harvey of Harvey Norman is a case in point.
In issue 124/Apr 03 (Buy - $2.02) we mentioned that he bought 2m shares at prices below $2.00 - when war hysteria was at its peak - and we were happy to back his judgment by calling the stock a buy. Remember that this is the same Gerry Harvey who sold stock in July 2001 at more than $4.00.

Legal disclosure
By law, all directors have to disclose to the ASX transactions within five business days of them occurring, which is a big improvement on the 14 days previously required.
Such announcements will generally be headed 'Change in Director's Interests' and can be viewed at www.asx.com.au or www.australianinvestor.com.au.
Be careful, though - many of the announcements made under section 205G of the Corporations Act cover the exercise of options. Whilst these can be interesting, they are nowhere near as useful as those where a director uses their own cash to purchase shares or is selling shares purchased with his or her own money. These are the ones to really watch out for