It’s always a good idea to keep a close eye on director dealings. After all, if anyone has inside knowledge of a company’s future prospects then surely it’s the bosses themselves. That’s why directors’ buying and selling activity is often closely monitored and widely publicised.
But, as with most things in life, it’s not always as straightforward as it seems. For example, it’s very possible that a director has sold a big chunk of his or her holding simply because they are splashing out on a new yacht, Ferrari, country mansion or divorce settlement. So it’s always best to view such dealings as triggers for further research, rather than outright buy or sell signals.
Personally, I always find it interesting when there is heavy buying activity from directors shortly after a profits warning. Here, company bosses may feel the market has over-reacted to what they perceive as short-term fixable issues. But this can sometimes be a ploy to shore up investor confidence. Oh, I’m such a cynic!
A great recent example of this would be FTSE 100 electricals giant Dixons Carphone (LSE: DC). In a trading statement issued last month the group said it now expects pre-tax profits for FY2017/18 to be in the range £360m-£440m – well below previous market expectations. The news sent the shares tumbling by as much as a third on the day. This prompted some directors to swoop in and buy a big block of shares on the cheap – often seen as a sign that management is expecting a recovery in the not-too-distant future.
The earnings downgrade was largely due to weaker mobile phone sales as well as the detrimental effects of lower EU roaming charges. The company said that currency fluctuations had made handsets more expensive ,and this in turn has meant that people are holding on to their mobile phones for much longer.
I’ve been a fan of Dixons Carphone for a while, and although the launch of the new iPhone 8 should help to boost sales in the medium term, I think the risks have now become too great for me to give the stock a buy rating for capital growth. However, the lower share price does make the stock more attractive to income seekers, with the shares now offering a generous yield of 6%, and ample dividend cover of more than two times forecast earnings.
Fall from grace
Another company that’s been having its fair share of problems in recent times is FTSE 100 utility giant Centrica (LSE: CNA). The parent company of British Gas has seen its share price halve from above £4 to below £2 in just four years. For a defensive blue-chip utility giant that’s a huge fall from grace.
Increasing competition in the energy market has led to a large numbers of customers switching to other suppliers, which in turn has weighed on profits. Nevertheless, a strategic review of the business has been implemented, which aims to reduce costs by £750m a year by 2020, with the company also having some success tackling its debt. I still see the shares as attractive for income seekers, who stand to collect a solid 6% annual return at current levels.
DON'T make these mistakes...
Investing in the stock market isn't just about making money - it's also about making sure you DON'T LOSE MONEY. That's why the leading experts at The Motley Fool have released this FREE and exclusive research revealing the The Worst Mistakes Investors Make.
To claim your FREE COPY simply CLICK HERE.
Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.