There has been some director buying at Record and Brewin Dolphin.
Following directors when they buy shares in the companies they run can be a profitable strategy.
However, director deals are certainly not a foolproof sign that shares are good value. For a start, the directors may have an inflated sense of their own management skills!
Also it isn't practical to buy every time a company director does, so you'll have to pick and choose what shares look most attractive as a matter of necessity. Again, that makes director deals just the starting point for further research, not a buy signal in themselves.
Here are two companies in the still-depressed financial services sector that look attractive.
Brewin Dolphin
Stockbroker Brewin Dolphin (LSE: BRW) was surely glad to see the back of 2009. In October the FTSE 250 company had to restate its profits when it was decided it hadn't been accounting for acquiring investment teams in the appropriate fashion. The restatement reduced 2008 profits by £4.2 million and lopped out over £6 million profit from the then-imminent 2009 results.
The shares actually rose on the news, presumably on relief it wasn't worse. But the share price started sliding again in December, despite full-year results that looked reasonable given the dire market conditions that year -- profits were down about a third, but sales and funds under management both rose.
Admittedly, there was then a £13.8 million share placing in late December, though that isn't a huge amount of money compared to Brewin Dolphin's near-£300 million market cap and the money raised boosted the company's regulatory capital surplus.
Perhaps the generally flighty markets in early 2010 didn't help the share price. Brewin Dolphin itself said in January that trading conditions had continued to improve in the first quarter to December 2009, with quarterly income rising 11.5% to £56.9 million. Funds under management also rose again, by almost 6% to £21.7 billion.
With the appetite for equities recovering in March, the five directors who bought in last week seem to have found a floor for the company's share price:
| Director | Position | Price paid | Cost |
|---|
| David McCorkell | Head of investment | 121p | £12,100 |
| Jamie Matheson | Chairman | 121p | £13,769 |
| William Hood | Deputy Chairman | 121p | £12,100 |
| Robin Bayford | Finance Director | 120p | £9,960 |
| Simon Miller | Non-Exec Director | 127.7p | £6,385 |
The shares are now up to 130p, for a 1.7x covered forward yield of 5.8% and a P/E of just under 11 -- not expensive if earnings per share do rise by the 13% expected.
Brewin Dolphin looks well-placed to recover with the markets -- assuming we don't see a second act (or should that be third or fourth act?) to the financial crisis.
And assuming no more accounting rewrites, of course!
Record
Record's (LSE: REC) chief financial officer Paul Sheriff clearly thinks his company's accounts are in good order -- on 4 March he splashed out £91,148 for nearly 140,000 of Record's shares as part of its Group Profit Share Scheme.
Sheriff paid 66p; Record's share price has since fallen to 64.5p.
Record is a currency management company that could offer value if we are indeed returning to financial stability.
Based in Windsor, it's still run by its founder, Paul Record, who floated the company in early 2008. His timing could hardly have been worse (or better, from his point of view!) with the newly listed shares sailing into the eye of a financial crisis that shook up every established market trend, including the currency 'carry trade' that had been profitable for many previous years.
Record's share price has fallen steadily from 160p at flotation, tracking earnings per share down from 2008's 12.65p to 8.73p in 2009, to a forecast of 5.25p for the full year to the end of March 2010.
Earnings have fallen as Record's currency management methods have struggled. Its Absolute Return product, for instance, fell 3.45% in the year to March 2009, and it fell again last quarter (though it had been recovering in the three prior quarters).
Assets under management have also fallen, hitting fees, and Record now has just 102 clients, compared to 118 in September 2009.
However the company has won new business, too, including two US pension mandates worth $7.9 billion -- a substantial slug of Record's $35.7 billion of assets under management 'equivalent', which is nonetheless down from $55 billion in 2007. (Record uses forward contracts to manage client exposure. It does not actually have $35.7 billion sitting in the bank, hence the term 'equivalents').
Even with negligible performance fees in recent times, the company still generates reasonable cashflow due to its modest overheads. Record has no debt and it had £27 million stashed in the bank as of September last year -- equivalent to around 12p a share. This despite holding to a generous dividend policy. The same 4.6p payment is forecast again for 2010 -- a 7% yield, it's just covered by predicted earnings. The P/E is approximately12.
In his third quarter trading statement, Neil Record -- who still owns around one third of the company -- said Record remained "confident in and committed to our long-term investment strategy."
If he's right and earnings do bounce back, the shares would be a bargain. In the meantime Record has the cash to protect it from further choppiness
It'd be reassuring to see its client list as well as its funds grow, though.
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