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Retail directors stop shopping

Created:
25 November 2008
Written by:
Knox D'Arcy Investment Management

The FTSE All Share General Retailers Index has more than halved in the current year, accelerating a decline which saw the index fall by 27 per cent in 2007. Recent results from retailers and market comment suggest a difficult Christmas trading environment ahead as consumers are expected to spend less during this period. Against this backdrop, we have analysed directors' trading activity in retail stocks in the run up to Christmas to determine whether their investment activity is indicative of market predictions or whether directors are showing confidence in the sector through their own share dealings.

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Research by Knox D’Arcy has shown that systematically following all directors' buying activity will not make you rich. The key is to identify those trades that are most likely to be true investment decisions rather than shares acquired by other means, for example, by way of bonus schemes, gifts or tax-motivated trades. The Knox D’Arcy methodology classifies directors' purchases into nine types of purchase, and from that analysis "investment" trades are identified. As few as 5 per cent of purchases are identified as potentially investment motivated trades which may deliver returns above that of the market.

What is significant about the run up to Christmas this year (since 1st August) is that, compared to the last three pre-Christmas periods, there has been a big fall in the value and number of directors' investment purchases. The total value of investment motivated share purchases has fallen by almost 60 per cent compared to the average value of investment purchases over the last three pre-Christmas periods. The average size of an investment driven purchase has fallen to £26,000 this year compared to £54,500 previously.

Turning towards directors' sales, there has been a fall in selling activity this year compared to previous years. This suggests that directors are waiting to see how the critical Christmas trading period unfolds, along with a reluctance to sell at depressed valuations.

Where sales have taken place, an analysis of directors' sales in bearish markets over the pre-Christmas trading periods shows astute selling. For example, last year we saw selling by directors of pawnbroker H&T Group in September 2007 totalling £1.6m ahead of a share price decline of 19 per cent by the end of first quarter of 2008. Similarly, there were share sales of £1m in Land of Leather in October 2007 - ahead of a 77 per cent decline by 31 March 2008.

Shareholders of WH Smith may wish to look at recent sales by five directors and senior officers following the exercise of options over the last few weeks (17 October 2008 - 5 November 2008) totaling £1.3m. Since then the share price has fallen to 326.5p, representing a 15 per cent fall from the average share price at which the directors and officers sold.

View company announcements relating to directors' deals

View other IC stories on boardroom share dealing and management changes

Knox D’Arcy

Knox D’Arcy Investment Management Ltd is an activist, value-orientated fund management company. It runs a number of innovative, specialist investment products on behalf of investors. It is investment manager to Eaglet Investment Trust Plc which is in the process of being restructured to The Directors’ Dealing Investment Trust Plc. The Trust will invest in companies listed on regulated exchanges in the UK which are identified as having patterns of directors’ trading which suggest that following such patterns could lead to attractive investment returns.

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