Directors sell for many reasons. They want a new extension. They need to settle a tax liability. Their partner files for divorce and wants their share. Or because they think the company is going down the pan. Naturally, they’ll never tell you the latter. Ask a director why they don’t buy and you’ll often get the well-parroted line of “I’ve got a mortgage and kids”, as if signing a piece of paper and having a family was a physical barrier to a director buying shares.
But unlike director sells, directors will only ever buy for one reason… usually. Certainly, nobody is holding a gun to their head and forcing them to buy. No, it’s because they believe the stock has upside and they want a piece of it. Again, usually. The other times, which are admittedly, are infrequent (but worth knowing about nonetheless), are when a director wishes to buy a token amount in terms of their own wealth in order to try to instil some confidence in the stock price.
This is rare – but it’s worth knowing that directors can and do use buys as a tool like this. The same goes with nil-cost options that are way above the current share price. Private investors can be lured into thinking that means the high cost of the option it’s because the directors think they’ll get the share price there and that it’s a sign of confidence in the company. But if the shares are nil-cost then, as the name implies, they cost the directors literally nothing and it’s pure upside for them. That's not to mention the transfer of wealth from you as the shareholder to the director’s pockets if the upside price is hit. In many cases, the directors will believe the share price target is unachievable, but the high price can become an anchoring point for private investors and so they bid the stock up. You need to be careful in the stock market because not everything is as it seems. Be cynical. But don’t be overly cynical.
All of that said, it still pays to pay attention to significant stock purchases by directors.
One example is On The Beach (OTB). Simon Cooper, founder and non-executive director of the company, bought almost £2.5mn-worth of stock in August at 88p. Four months later, the business puts out excellent results and the price rallies to 140p. It looks as though the rebound is on for the company.
Another example of large director buying is at Victorian Plumbing (VIC). The business listed in 2021, and then lost nearly 90 per cent of its value, before recovering and rallying 200 per cent back to 90p. A real rollercoaster. Since December 2021 chief executive Mark Radcliffe has bought more than £3mn in shares. This may look like a lot on paper, but we have to consider this in terms of the sales he took out the business during the IPO. This number is £212,424,760.86 to be exact, and therefore his recent buys are less than 2 per cent of his sales.
Chart 1 shows the stock’s IPO and collapse. It’s always easy to say in hindsight, but the signs were there. Just like the saying 'beware of private equity bearing gifts', so too should you be wary of businesses where large shareholders are taking money off the table. They know the business better than you. They know the business better than the smart money. And they ought to know the business better than anyone else on the planet. After all, it’s their business. And if these people are motivated sellers, do you think you’re getting the best price?
But even if you ignored that, the chart tells you everything you need to know. It repeatedly hit new all-time lows, the price was trending downwards as were all of the moving averages, and eventually a profit warning emerged. The slide in the price wasn’t sudden and it was well telegraphed.
However, since October 2022 the stock has had improving fortunes. Moving to Chart 2, we can see the stock bottomed on huge volume, rallied sharply and tripled within three months.
Since then, the stock has traded sideways in a range. This is common when a stock rallies and needs time to breathe. A stock price tripling means plenty of paper profit that will often be crystallised, and so sellers need to find new buyers willing to take up the shares for a potential next leg up.
There were no surprises in the results released in November. Revenue and margins rose. Cash flow is strong with a solid balance sheet of £46mn in cash. The macro environment is tough but with rates potentially having peaked the consumer backdrop may improve in 2024.
That said, the area highlighted on the chart for me is the most important. A break of 92.5p would put the stock into highs not seen since February 2022 – before the Russo-Ukrainian war.
Another advantage of Victorian Plumbing is that it trades via Sets, the London Stock Exchange's main trading system. Therefore, stop-limit and limit orders can be used to buy, and stop market orders can be used as a stop-loss. Don’t underestimate the efficiency of these orders, as they can be used both to get better prices and to get you out of a stock if certain price levels are hit.
