Directors have put their money where their mouths are at these five companies.
I always keep an eye out for directors buying shares in their own companies. It's one useful way of generating investment ideas for further research.
I'm going to tell you about five companies where directors have recently been opening their wallets to make major share purchases. Two of the companies are FTSE 100 (UKX) blue chips: Admiral (LSE: ADM) and Barclays (LSE: BARC). Two are mid caps: Chemring Group (LSE: CHG) and Fidessa Group (LSE: FDSA). The final company is an intriguing small cap called Hydrodec Group (LSE: HYR).
Barclays
In August, Barclays announced the appointment of City veteran Sir David Walker as its new chairman in the wake of the LIBOR scandal.
Sir David, who had led the inquiry into corporate governance in the banking sector after the financial crisis, bought his first Barclays shares in September: £54,000 worth at an average price of around 215p a share. The chairman added to his stake at the beginning of this month, spending a further £115,000 at just over 230p a share.
Sir David's investment is already showing a healthy gain with the shares currently trading at 252p. Despite the rise, Barclays is still on a forecast price-to-earnings (P/E) ratio of under 8 for the current year, falling to 7 for 2013.
Admiral
Back in September, the wife of the chief executive of car insurance group Admiral went on a £2 million buying spree, bagging shares in the company at an average price of a little over 1,100p.
This month there's been heavy buying by the company's chief operating officer, David Stevens, and a non-executive director, John Sussens. The COO splashed out almost £1 million at 1,022p a share, while the non-exec bought over £200,000 worth of shares in two lots at 1,064p and 1,081p.
Admiral's shares are currently trading at 1,085p, giving a forecast P/E of a reasonable, but not overly exciting 12 for the current year, but a whopping forecast dividend yield of 8%. Admiral has an attractive dividend policy for income investors, as it produces a big distribution of cash to shareholders. With the yield standing at its current level, you can see why the directors have been keen to increase their own shareholdings!
Chemring
Mid-cap Chemring has been profit-warning prone of late, but directors at the defence group have recently shown their faith in the company's future by digging deep into their pockets to buy shares at a current lowly level.
Chairman Peter Hickson and new CEO Mark Papworth each bought over £100,000 worth of shares last week at around 225p a share and were joined by a non-executive, Vanda Murray, who made a small, ISA-sized purchase. The company will be giving an update on trading this coming Tuesday ahead of full-year results in January.
As things stand, at a share price of 229p, the forecast P/E for this year is 6 with a flat dividend expected, giving a yield approaching 7%. The directors are clearly looking beyond the near-term challenges of defence budget constraints in NATO markets.
Fidessa
Fidessa, a FTSE 250 firm with a suite of financial software products and services, has been described by shrewd fund manager Nick Train as "an exceptional company by all criteria and certainly one of the UK's handful of global technology leaders".
Revenue and earnings growth at Fidessa have slowed over the last year or two with the ongoing travails of the financial sector, but two directors were keen to buy shares at 1,274p last week. Chairman John Hamer bought over £30,000 worth and CEO Chris Aspinwall splashed out around £133,000.
The directors paid 16.5 times current-year forecast earnings, but the shares have since risen to 1,424p and the P/E to 18.5. With growth at the business expected to be fairly stagnant over the next couple of years, this is perhaps one that investors could wait on for renewed weakness in the share price.
Hydrodec
I'd imagine few readers have come across Hydrodec before. This cleantech industrial oil re-refining group is listed on AIM and has a market capitalisation of little more than £50m. Revenues have grown six-fold over the past five years but the company has yet to make a profit.
On the face of it, that may not sound too promising. However, Hydrodec has pulled off something of a profile-raising coup with the recent appointment of a new chairman: Lord Moynihan. The energy minister from 1990 to 1992, Lord Moynihan recently stood down as chairman of the British Olympic Association after a seven-year term during which he oversaw Team GB's successes in the Beijing and London games.
Since the announcement of Lord Moynihan's appointment as the chairman of Hydrodec in October, he and his fellow directors have been buying shares with a vengeance.
| Date of buy | Buyer | Share price | Value |
|---|
| 2 November | Lord Moynihan | 12.5p | £98,750 |
| 31 October | Chris Ellis (chief financial officer) | 10.75p | £48,144 |
| 30 October | Andrew Black (non-executive director) | 9.9p | £494,750 |
| 24 October | Lord Moynihan | 9.0p | £198,929 |
A fairly impressive show of faith from the directors of a loss-making company I think you'll agree! The shares are currently trading at 11.25p.
Contrarian
The five companies in this article all face challenges of various sorts in the short term, but the directors have backed their businesses against the market's present valuation of them.
Taking a contrarian stance is a route to achieving market-beating returns. This is amply demonstrated by outstanding City investor Neil Woodford, whose funds have outperformed the market by more than 300% over the past 15 years.
If you'd like to learn about Woodford's enormously successful strategy and some of his current top contrarian picks, help yourself to the free and exclusive Motley Fool report, “8 Shares Held By Britain's Super Investor”. The report is available for a limited time only, but you can get it sent free to your inbox right now: simply click here.
> G A Chester does not own shares in any of the companies mentioned in this article.
