Directors at Saga (LSE: SAGA), the over-50s travel and insurance group, signalled their confidence in its long-term prospects with recent share purchases.
In spite of last week’s profit warning which sent shares in the company plunging more than 20%, Chief Executive Lance Batchelor was among the buyers, with purchases of more than 72,000 shares for a total consideration of nearly £100,000 since 6 December.
CFO Jonathan Hill was another significant buyer after purchasing 17,400 shares at 132.6p on 11 December, for a total transaction amount of more than £23,000.
Sign of confidence
Directors sometimes buy after a significant drop in the share price of their company, demonstrating that they believe the stock has been oversold. And when they do so, this is usually seen as a sign of confidence in the company’s prospects.
Some investors take this as a buying signal, especially if the director in question is in a position of knowledge and exercises significant day-to-day management over the company. This seems to be the case, with the CEO and CFO of course being among the very top positions within the company’s management structure.
Historical evidence shows that whenever directors acquire significant quantities of shares in the companies they manage, the stock often outperforms the market in the months to come. This would suggest that an investment strategy which follows the pattern of director dealings has the potential to produce market-beating returns.
More pain ahead?
Nonetheless, I’m cautious about buying the shares myself as I believe there could be more pain ahead for shareholders. With the ongoing shift from insurance underwriting to insurance broking and increasing customer acquisition costs, Saga’s profits could have a lot further to fall before eventually making a recovery.
And although valuations are undemanding, with the shares trading at 9.5 times expected earnings this year, the operating environment remains a challenge. This means a re-rating in its shares beyond 11 times forward earnings over the next 12 months appears unlikely to me.
Selling activity
Meanwhile, there was also noticeable selling activity with housebuilder Berkeley Group (LSE: BKG) recently.
Karen Ellis, wife of executive director Sean Ellis, sold 65,000 shares, worth nearly £2.7m, on 11 December. Sean Ellis is currently the Chairman of St James Group and the Berkeley Homes Eastern Counties Division, and has been a Divisional Executive Director since 9 September 2010.
This follows on from other major share disposals earlier this year, which included sales from Chief Executive Robert Perrins’ wife and veteran chairman and co-founder Tony Pidgley, who sold 500,000 and 750,000 shares, respectively, in September.
The market doesn’t take too kindly to major players wanting to sell, but ultimately it’s the fundamentals that determine the stock in long term. At odds with the signal from recent share dealings, management recently lifted its five year pre-tax profit guidance from 2016 to 2021 to £3.3bn, up from £3bn previously.
However, when we look further ahead, there are also reasons to be less sanguine. Berkeley is seeing a significant reduction in reservation rates, especially in the capital, reflecting weaker demand amid Brexit uncertainty. Although this has so far not had a discernible impact on average selling prices for the group, Berkeley cannot be immune to market conditions forever.