Looking at director dealings of FTSE 100 businesses can provide some valuable insight for everyday investors. After all, executives know far more than most about the businesses they run, so seeing them buy or sell their own shares can be a powerful indicator.
If directors are buying, that signals long-term confidence. If they’re selling, that could spell trouble ahead. So when seeing the CEO of Auto Trader Group (LSE:AUTO), Nathan Coe, sell off £1m worth of shares recently, it raised some alarm bells. Especially since the CFO and COO followed suit, selling off half a million each. Should investors be worried?
The selling frenzy
Seeing the top three executives in a FTSE 100 company sell en masse certainly doesn’t look encouraging. But digging deeper, these reported figures are a bit misleading.
In reality, this particular sale doesn’t indicate anything is wrong. Why? Because these transactions emerged as a result of receiving stock-based compensation, around half of which was immediately sold and converted into cash. However, since a good chunk of the shares received were kept, the level of insider ownership among these executives is now actually higher than before this recent sale.
Looking across all three directors:
- Coe still holds a position of 3,322,270 shares worth £29.2m
- CFO Jamie Warner still holds a position of 102,162 shares worth £896.5k
- COO Catherine Faiers still holds a position of 134,476 shares worth £1.2m
What now?
In most cases, when directors start selling, there’s often little need to panic. Directors can sell for a vast number of reasons, most of which are innocent, from raising capital to buy a house or simply diversifying their net worth.
So in the case of Auto Trader, if I were a shareholder, I certainly wouldn’t be rushing to sell anything based on this news. However, that doesn’t mean the stock’s a guaranteed success either.
Since going public in 2015, the firm’s achieved tremendous growth. Loyal shareholders have been rewarded with a total return of more than 260%, or 15.2% on an annualised basis. And the platform’s now a critical component of the vehicle-selling market.
It’s not a capital-intensive business, and with recurring transactions from constant demand, Auto Trader’s transformed itself into a cash-generating machine. Needless to say, that’s a powerful trait to have and certainly explains why the stock’s been so successful to date.
Yet, moving forward, things aren’t as transparent. As electric vehicle (AV) adoption continues, the landscape for car dealerships is changing. Taking a look at US-based Tesla, the company deals directly with customers rather than relying on third-party dealerships. And it’s a challenge that Auto Trader will have to overcome in the future, especially if other EV manufacturers follow in Tesla’s footsteps.
