Should you watch director’s dealings?

46 Comments

1. 

   David
   May 16, 2012 at 8:26 am:

   A Matrix (MCE) director sold 1million shares (nearly 50% of his total holding) in March this year at a time when the price was around $3.80 per share.

   Today MCE went into a trading halt at the last traded price of $2.35. Read what you like into that…..

   • 

     Paul
     May 20, 2012 at 11:09 am:

     In regard to directors buying and selling shares, in the early 2000’s HIH insurance was on a roll, a director, Mr.Williams bought a significant amount of shares. At the time I though this was a positive signal to the market, that was his intent. I am glad I did not buy at the time as the company was already in free fall.

     • 

       Roger Montgomery
       May 20, 2012 at 5:17 pm:

       You’re right Paul. I am pretty certain any rigorous analysis would show that the sell signals are more useful than the buy signals.

2. 

   Andrew
   May 15, 2012 at 2:57 pm:

   Just begun my third reading of value.able and just had a thought and decided to post it up here.

   It is quite funny that the efficient market theory had its roots set in MIT as this is the same university that was famous for its card counting blackjack clubs. These card counters used tactics that can be compared to value investing (betting big when the odds are in your favor otherwise taking a step back and wait for the opportunity). One could say that blackjack is far more rational than the stock market due to metrics that change very little.

   Sorry, not related to the above but just thought I would share some thoughts that popped into my head when reading value.able

3. 

   Paul Martin
   May 13, 2012 at 9:21 am:

   Hi All

   I feel the issue for JBH is not so much the maturing of the business, and neither is it the threat from online competition. – after all sales are rising still. The issue at the heart of their slumping profitability is the margin decline, and this is being influenced by what is being sold in the stores, and at what margin. The market dominance of Apple, clearly a price setter, is impacting margins significantly. Deflation of key product lines such as t.v’s is also playing a part in the margin contraction. The key question is whether this is temporary or permanent? I’d be watching margins before making a move back into the stock.

   • 

     Roger Montgomery
     May 14, 2012 at 11:35 am:

     60 inch Sony LED TV just $1900 on the weekend in Sydney. Have to sell a lot of them to make last year’s numbers. Having said that the store was jam packed.

   • 

     Ash Little
     May 14, 2012 at 8:32 pm:

     Hi Paul,

     I have done some quick maths on this.

     Yearly revenue times 2% (current margin contraction) equal a lot of money.

     Discount this back over a few years and it is indeed an eyebrow raise.

     As you say “The key question is whether this is temporary or permanent?”

     Time will tell.

     They took on too much debt via the share buy back at just the wrong time but they are still a strong company that should do well from this economic malaise, just not with my money involved anytime soon.

     Cheers

4. 

   Tony Connellan
   May 12, 2012 at 12:32 pm:

   I like to keep track of directors share movements in the coys in my portfolio . 5 directors of IRE have recently been buying small parcels (a total of 53600 between $6,38 & $6.14) The share weakness is probably resulting from IRE’s 1st half report where earnings slipped by 18% (a small hiccup to be taken advantage of?) This slippage is probably a result of the coy investing in its own future. It was able to fund this without the need for debt or more capital. This coy has been a great performer in the past and should continue to be so into the future (I hope I am right) . By my calcs it is selling just a little under its IV , that plus the directors buying indicates to me that at current prices it is trading at reasonable value. This is a coy that usually is too expensive for value buying.
   Disclosure I own shares in IRE.

5. 

   Steve Moriarty
   May 12, 2012 at 10:52 am:

   JBH Directors have been selling steadily since 2006. For example Terry Smart sold 80,000 shares at $4.96 in 2006. Even with the current share price he would have been better not selling at that time. So I think it is important to take a look at the whole history of buying and selling rather than a snapshot? I suspect some shareholders are developing thoughts regarding JBH based on the large fall in the share price and then interpreting some behaviours to fit the story.

   In regards to mean reversion, JBH’s P/E is 8.9 below the market average of 13 and the sector’s average of 11.56. Their price/sales is .35 and the market is 1.75 and the sector is .65. So for these measures, they appear to indicate that they are currently below the mean and if there is to be some reversion to the mean then the share price would be heading northwards rather than the other way.

   I believe Roger has said before that there are many reasons for selling but only one for buying (correct me if I am misquoting here). As the Terry Smart example above shows Directors are not necessarily correct all the time.

   There has been discussion on JBH and whether it is still a good investment or not on other posts, but considering the sector’s recent past, the fact that institutional investors are steering clear of retail (and consider their fixation on the short term rather than long term) and the fact that their competitors are dropping like flies, it would appear that JBH may well be among those left standing. It is difficult to imagine that there will be no electronics retailers in Australia.

   Steve

   • 

     Roger Montgomery
     May 13, 2012 at 7:40 am:

     Indeed.

6. 

   Steve
   May 12, 2012 at 8:09 am:

   Hi there Roger,

   Your tireless efforts to help investors is not going unnoticed at the highest levels. As an experienced investor (and former professional one), I have had many reasons to reflect on my own personal approach, thanks to your book and now Skaffold.

   My broker just told me that he and his team are all using Skaffold too and I know they don’t take third party products easily. So well done to you!

   Your fund is outperforming, Skaffold is now being accepted as mainstream by major institutions and some of the brightest minds in the industry are joining your team.

   So from an old pro, stay humble, keep getting great returns, keep putting your customer first and never ever fall into the trap of being drawn in to responding to derogatory comments. Leave that to your weaker competitors and the low-lifes that only like to listen to themselves. They’ll dig their own grave – as I can see is already occurring.

   And finally, for what its worth – watch out for Japan.

   • 

     Roger Montgomery
     May 13, 2012 at 7:40 am:

     Hi Steve,

     Thanks for taking the time to write those encouraging words. We’re trying!

7. 

   David King
   May 11, 2012 at 3:24 pm:

   Check out the directors’ dealings in and out of shares in Primary Health Care (PRY) over the past few years. The share price curve (check the past 5 years, say) would make a fine ski slope, but the directors’ dealings suggest that, though the business is healthcare, its primary usefulness to its directors may be as a sort of fun poker machine.

   Question: are there any practical or legal limits imposed on directors’ dealings, providing they are disclosed?

   • 

     Roger Montgomery
     May 11, 2012 at 7:41 pm:

     More onerous requirements around a company’s trading policy are being rolled out however disclosure has been seen to be the panacea.

8. 

   Phil Crossan
   May 11, 2012 at 11:26 am:

   About 1.75M HVN shares were sold by two directors in the second half of 2009 for an average of about $4.25. The price has fallen to value pretty much since then.

9. 

   Keith
   May 10, 2012 at 6:16 pm:

   There is a expectation in the popular imagination that the captains in positions of responsibility will act selflessly in the interests of the passengers under their care.

   The Captain of the Concordia abandoned his crew and passengers to save himself despite threats from the Coast Guard to fulfill his duties and return aboard to coordinate the rescue of the remaining passengers.

   So too, our Captains of Industry are selected more on personality (eg. Captain of the Concordia was propositioning a Dancer in the Ballroom at the time of the crash) than moral fibre.

   So expecting the Directors to stay with the sinking corporate ship they command is not a realistic view of human nature.

   • 

     Roger Montgomery
     May 11, 2012 at 7:43 pm:

     A useful analogy Keith. Thank you.

10. 

    David Jones
    May 10, 2012 at 1:03 pm:

    Hi Roger,

    See below excerpt from ASX release by CWN re James Packer’s indirect purchase of Echo shares. I’d be interested in your thoughts about this. Regards David :

    ASX / MEDIA RELEASE
    FOR IMMEDIATE RELEASE
    10 May 2012
    RESPONSE TO MEDIA SPECULATION REGARDING CROWN AND ECHO
    MELBOURNE: Crown Limited (ASX: CWN) makes this announcement in response to the following
    statement that appeared in today’s press:
    It is believed Packer has continued to “borrow” stock in Echo in a complex financial transaction that means he
    is not required to disclose his interest.
    Crown confirms that the only interests (either by way of physical holdings or through derivatives) that it and its
    associates have in Echo Entertainment Group Limited shares (“Echo Shares”) are as set out in Crown’s
    Notice of Change of Interest of Substantial Holder dated 8 March 2012.
    Crown also confirms that Consolidated Press Holdings Limited has authorised it to confirm in this
    announcement that neither that company nor its associates hold any interests in Echo Shares, whether by
    physical holdings or through derivatives, other than it is deemed, under the Corporations Act, to have the
    same interest in Echo Shares as Crown has.
    ENDS

    • 

      Roger Montgomery
      May 11, 2012 at 7:49 pm:

      Hi David, Would you like me to explain the derivative transactions generally? It is something I am happy to discuss in a blog post. The flip side is the collar put on by execs as a hedge:

      From Bloomberg:
      “SUSPECT CORRELATIONS
      Bettis and his co-authors examined 2,010 hedging transactions reported in filings by 1,181 executives at 911 firms between 1996 and 2006. In the year preceding executives’ hedges, their companies’ shares outpaced the market anywhere from 17% to 31% on average, depending on the type of hedge used, according to Bettis’ analysis, which was completed last year. After the executives hedged, it’s a different story. Shares in companies where the CEOs, directors, and other top executives had hedged using a variable forward sale lagged the market by 16.2%, on average. Those where a collar, another popular hedging transaction, had been used fell behind by 25%.

      Roughly 11% of the companies where an executive used a collar had to restate financials within two years of the hedge transaction; comparable companies where no hedging occurred had half as many restatements, Bettis says. Some 11% of the firms that let their executives buy a variable forward contract faced securities-related suits within a year, double the number at companies that didn’t hedge. “The poor performance following hedging suggests a number of these trades are potentially based on privileged information,” argues Bettis. The trades “appear to be tied to events that were known or could reasonably have been anticipated by the executives,” he adds.”

      More soon.

      SEC officials say executives who hedge fall under the same rules as those who sell their stock. If an executive were to use a hedge to protect himself against losses at a time when he possessed specific material information that the company’s performance had stumbled or was about to, that could potentially bring an insider trading charge. But SEC spokesman John Heine says the agency has never pursued an insider trading case against an executive following a hedge.

11. 

    James
    May 10, 2012 at 7:34 am:

    I concur with your views Roger. One would think companies of interest are attrative due to future (and ongoing) high ROE’s (intrinsic value) Therefore, directors & officers shareholding interest’s & activity should reflect their view of their companies future ROE.

    JB Hifi like all companies are subject to the “doctrine of the reverting mean”. Only highly strategic, adaptive companies can re-invent themselves or be brave enough to creatively destruct themselves to extend the “reverting mean” horizon and maintain high ROE’s. Companies are people and boards direct companies. Directors interest’s reflect “time and skin in the game” and are another intangible measure of perceived future ROE performance.

    More importantly, you only need to understand at great depth (i.e. directors & officers) a “handful” of companies with meaningful intrinsic value (mathmatically even easier thanks to Skaffold).

    An example of sale of shares was Michael Chaney’s WSF shares when he sold some in the $33-36 range some years ago (I forget what actual price and when though). He did however, admit publicly it was a good opportunity to sell at a price in excess of his personal perception of WSF share value. Roger you can fill the rest of current/future WSF intrinsic value thoughts,as its a favourite topic of yours.

    I can’t talk I sold WSF at $7.70 in 1996 and went to Europe for a holiday. Could have gone for much a longer one if I followed Michael’s lead and waited.

    Is this why there are only “a handful” of A1, A2 & B1 in all that market noise?

    • 

      Roger Montgomery
      May 11, 2012 at 7:54 pm:

      Boy oh Boy James 0- have I had to learn a thing or two about creative destruction. Great stuff. Thank you.

12. 

    Hiten
    May 9, 2012 at 6:50 pm:

    That is just not right what the former JBH CEO did. Would be interesting to find out if the former CEOs of LEI, MQG offloaded their shares just before their departures when the stock was at it’s peak.

    Even more interesting would be to see QBE’s CEO actions prior to his retirement in Aug 2012. I understand he sold 75,000 shares recently to fund QBE’s employee share and option share plan loan. Is that fairly standard practice? Also, I note after the sale he still owns nearly 1.5million shares and 600,000 options approx.

    • 

      Roger Montgomery
      May 11, 2012 at 7:56 pm:

      I reckon the key is watching two things: The portion sold over a period relative to the original quantum held and the portion of the individual’s total wealth the total and remaining stakes represent.

13. 

    Ash Little
    May 9, 2012 at 4:14 pm:

    Hi Room

    Have a look at CMI

    Just terrible

    Cheers

    • 

      Michael
      May 12, 2012 at 4:50 pm:

      Skaffold is very excited about it – an A1 and a 51% discount.

      • 

        Roger Montgomery
        May 13, 2012 at 7:38 am:

        Skaffold IS NOT excited about anything. Skaffold simply reflects the forecasts available by consensus analysts – if they change so will Skaffold’s values.

    • 

      Nigel
      May 14, 2012 at 11:34 am:

      Ash, please I’d appreciate your reasoning for such a bold statement.
      To me it looked OK on the following
      A1
      discount of 51%
      no debt
      last ROE was very healthy
      reinvesting all their dividends
      I’ve scrutinised their reports, and 2 things are apparent, they wrote off 8.5m which was a loan to the buyers of CMI Industries (now in the hands of receivers) which caused a one off loss, but if that is stripped out there appears to be an underlying healthy profitability. Admittedly the TJM portion is not performing, but plans are in place to lift that, but the Electical/Cable business seems to be motoring along at a decent clip.
      Please tell me what I’m missing, your thoughts are very much appreciated.

      • 

        Ash Little
        May 15, 2012 at 10:15 am:

        Hi Nigel,

        This is in relations to directors dealings,

        Go back over the last 12 Months ASX annoucements and have a look, particularly the one on 25 February 2011.

        The directors may be be running this business in the interests of all shareholders.

        Cheers

      • 

        John C
        May 16, 2012 at 12:35 am:

        They’ve got debt now Nigel after their settlement with Trojan (see May 14th announcements). Also, check out the reasons TJN gave for their application to have CMI wound up on 9th August 2011. Here’s a link to that announcement:

      • 

        John C
        May 17, 2012 at 12:02 am:

        Sorry that link didn’t work. Use ComSec, or go straight to the ASX.com.au and trawl through the last two years worth of announcements by CMI to the ASX, the most relevant starting at the “Becoming a substantial holder” announcement on 24/11/2010, and continue through in chronological order from there. The February ones are most interesting, especially 22/02/2011(pages 3 and 4 in particular). The final settlement (with Trojan; ASX: TJN), announced on Monday this week (14/05/2012) which involves CMI buying out their own Class A Shares and cancelling them, will obviously affect the value of the holdings of ALL CMI share holders, many of whom were not Class A shareholders. They shall now see their company having to use up all of its cash reserves and also draw down substantial debt (most of its existing debt facility in fact), just to fund the Class A shares buy-back, which leaves it in a completely different capital position than where it was just a week ago (albiet then with a winding-up application pending, which should now be avoided), for now.

        More generally, I am one that would like to see harsher legislation (and then penalties applied) to convict (and convicted) perpetrators of acts that the AGTP regards as constituting “unacceptable circumstances” (on 22 February 2011), than costing the entire body of shareholders (including ordinary retail investors who had no knowledge of the suspect transaction that had been made until they read about the legal action) money by way of a loss of value in the shareholding. I think it’s far better to punish the perpetrators themselves, and make it matter enough to act as an efficient deterrant in the future. We all know how long insider trading prosecutions take here in Australia (to use just one random example) – years, and usually twice as long as they would in the USA, and then we hand out lower penalties that are less of a deterrent when we do finally secure a conviction (and of course after all the appeals processes have finally been exhausted).

        Maybe not enough cops, not enough (high-tech crime detection) weapons, and too many to catch and process. And that’s only when an actual crime (is aledged to have been) comitted. So many more instances fall into grey areas, or are completely legal and above board, but they stink anyway. All we can do is keep trying to research and rate management as an important part of rating the quality and performance and future prospects of a company… and avoid those that seem suspect in our own eyes.

        Disclosure: I don’t hold CMI shares (ordinary or Class A), and never have, but in hindsight, a few lucky “investors” could have doubled up if they’s bought some Class A (ASX: CMIPC) a year ago. Even buying in 4 or 5 months ago would have given you a profit of around 33% There are winners and losers here. I question whether the interests of everyday shareholders have been put first . For every shocker there’s a sparkler however, and for me, that would be ARB Corporation (ASX code: ARP), and yes, I DO hold ARB The businesses of ARB and CMI do share some similarities (in some of the things that they manufacture and sell), but the differences in the ways these two companies are run are striking. SQRs will give you part of the story, but always dig a little deeper. They may look similar in some screen shots and using some metrics, but look at their track records (especially CMI’s announcement on May 14th 2012).

        Very Happy to continue to hold ARB Corp (ARP), especially through the storm of general negative sentiment to stocks that has seen most stocks fall (and many heavilly), but not going to be buying any CMI while their currrent management and directors a running that show.

        A quick general comment – I hope that we are seeing what may become the beginning of the generational opportunity (mentioned by a couple of people recently) to pick up stocks at well below IV and at close to the beginning of a secular bull run. It would be great to know what Roger is buying. So too Matthew Kidman. And Ash Little. I’m mostly holding back. I’ve doubled up my ILU and my CCU holdings today, but I’m holding back some cash for when it gets even worse, and, for now, there does seem to be plenty of catalysts for days like yesterday (Wednesday 16th May, worst one day ASX fall since December 2011) to reoccur. There WILL be opportunities to BUY.

        Cheers, and happy hunting!
        JC.

      • 

        Roger Montgomery
        May 17, 2012 at 2:30 pm:

        Thanks John,

        We are getting excited and have our fingers on the trigger for a number of stocks that have been discussed here in the past. Will keep you posted so stay tuned.

      • 

        Nigel
        May 18, 2012 at 4:34 pm:

        Hey Guys, I appreciate the comments, I’ll have another look at it over the weekend.
        Thanks for the solid input, that’s what I like about this site,
        Cheers

14. 

    Mick
    May 9, 2012 at 8:32 am:

    Hi Roger I rate buying and selling of shares by directors as crucial in an investment decision.I would prefer to not invest in a company unless director/directors hold substantial shares in their company.The way I see it is if the directors don’t see value in their own company why would I invest.Also I like to know how much the directors have paid for their shares and if possible enter below their price paid.I see director shareholdings as another piece in the puzzle along with the fundamentals of the company.

    • 

      Roger Montgomery
      May 9, 2012 at 1:56 pm:

      Indeed! I do too. Thanks Mick.

15. 

    Paul Audcent
    May 9, 2012 at 7:38 am:

    Yes I often look on Etrade at directors notices of buying and selling on the companies I hold. Its a dog eat dog world out there and its sometimes called insider trading?

16. 

    Andrew
    May 9, 2012 at 6:46 am:

    I personally will not pay that much attention to announcements about whether a director is buying or selling shares as long as the company still represents an investable company for me. So that is how i use the announcements, a flag to think about the business and do research to see if it still meets my requirements.

    I do believe that an investor has the right to question them as to why they are selling but i don’t think the investor should expect a really truthful answer so will be back to making decisions based on how they feel anyway. I like to see directors buying however (with their own cash, not through gift wrapped options).

    So that is my response, have a look at them, but don’t make an investment decision purely based on whether a director is buying or selling.

    JBH for me, still represents a company that is investment worthy at the right price. I believe i have a good enough handle on this company to make informed decisions myself. It does have its headaches at the moment but is well placed to deal with them. There were already hints before the former CEO sold his stake that JBH was a maturing company so the “informed” investor would already be making allowances of that in their analysis and valuations.

    I think the more important flag to look at in regards to directors and CEO’s actions are not the buying/selling but the resigning/retiring kind of activity (especially if this is happening frequently). This can either be an indication that things are not all rosy at worse and a potential change of strategy at best.

    • 

      Roger Montgomery
      May 9, 2012 at 7:41 am:

      Good points as usual Andrew. Thank you.

17. 

    Michael Horn
    May 9, 2012 at 6:46 am:

    Watching director transactions is something I do, but one should couple this with fundamental analysis, because sometimes the cue can be misleading. I still have some shares that I bought in 2007 when I sallied into the market with more cash than understanding, and these include BOL, VMG and KSC.

    BOL directors have bought shares in the past, only to have the SP continue to deteriorate. Jim van der Meer, the father of VMG, sold shares at about 40 cents (I considered selling as a result, but did not) and the SP plummeted further. The directors of KSC have often bought shares, but the SP has on the whole continued to slide. Whether one should take heart in the fact that KSC directors are still buying shares, I do not know, but I hold because the dividend is OK, and something might fall out of the sky – a takeover perhaps. KSC is one stock on my culling list – it’s just a matter of when.

    The MD of CCV bought shares at something like 65 cents two or so years ago, so I jumped in at 69 cents. The SP rose to about 87 cents on the basis of a possible offer of 90 cents from a substantial shareholder, and I substantially got out at 84 cents. The 90 cent offer was withdrawn, and CCV is now below 60 cents (probably worth investigating)

    I was concerned that the MD of TGA did not subscribe to the rights issue at $1.85, but I went ahead and took up mine. The SP today is circa $1.40 Is this happenstance (probably), or did Mr Hughes know something. The annual report due on 22 May should shed light on this.

    Business Spectator used to report director dealings, which I looked at daily, but this stopped in November 2011. Where can one find this information today. I read the ASX announcements of the shares that I hold, but that misses the ones I do not hold, and in which I could be interested.

    • 

      Mike
      May 11, 2012 at 6:20 pm:

      I use CommSec to trade and all announcements relating to my portfolio or watchlists are flagged daily. I check prices daily in this volatile situation to see if a desirable company has lost favour and may interest me. It is my routine and alerts me to all current movements in announcements, director dealings, etc. There is no limit on the number of watchlists you can run, so you can monitor what you wish.

      • 

        Michael Horn
        May 12, 2012 at 12:15 pm:

        I mainly use Westpac, and I look at my two portfolios (SMSF and personal) a few times a day, and I check the announcements religiously. As you say, I could build a watch list of stocks that interest me, but which I do not hold – however this still excludes the next level of stocks that, the ones I might peek at following buying or selling activity.

        The matter is not very important to me, because I am in the process of cutting back on the number of stocks in my two portfolios, rather than adding more. Like reading about Darwin, or Moshesh (founder of the Basuto nation) – it is a matter of mild interest, rather than being a must-know.

        I use ComSec for my SMSF, and Westpac for my playpen stocks (personal holdings). To see them all, I have set up both portfolios as two separate watch lists. Initially I created the SMSF watch list to circumvent my employer’s blocking access to ComSec, but not to Westpac.

18. 

    Christophe
    May 9, 2012 at 4:33 am:

    Hi Roger,

    interesting post!

    Yes, I can name one, MML.

    I was really surprised to see in the space of a week 21-26 March to see three Appendix Y on the ASX news for this stock (http://www.medusamining.com.au/newsroom/index.html).

    Seeing that the share price has gone down from a high $6.50 and was getting close to $5.00, having not one but three directors buying shares was definitely confirmation that they believe in the company and a sign that either they saw the share price as undervalued OR that a big announcement was coming OR both!

    In this case I think it was both with two weeks later an update on the Co-O Drilling that was very positive.

    The above combined with Praveen article, personal research, skaffold review and technicals showing a support level tested and held twice at $5.00 got me into action around this price.

    MML is now trading around $5.50, so +10% in the space of a month, not bad! Time will tell…

    • 

      Roger Montgomery
      May 9, 2012 at 7:31 am:

      Well done Christophe. Keep us posted and thanks for sharing.

19. 

    Nick Mason
    May 8, 2012 at 10:34 pm:

    Hey Roger, my observations concur similarly to yours, that is that director selling has a lot more to do with when to sell than directors buying has to do with when to buy. Although there are some great stories of the latter (usually involving junior mining companies.)

    One company in which I purchased shares a couple of months back, (asx code MVP,) has seen consistent director buying over the last year and a half, although I now believe their stock to be overvalued. That said it is an interesting company and readers of this forum may want to check it out.

    • 

      Roger Montgomery
      May 9, 2012 at 7:26 am:

      Thanks for the suggestion Nick. Looks like since 2007.

      • 

        Nick Mason
        May 10, 2012 at 6:54 am:

        You are correct Roger although in my research it was the last one and half, two years of director buying I concentrated on. This coincided with the arrival of their new CEO John Sharman who has done an incredible job transforming an average company with great products into a very lean, productive and efficient company with great products. This transformation being represented in the substantial increases in profit, revenue and margin figures. Although as I said, currently expensive by my calculations.

    • 

      Rob S
      May 10, 2012 at 7:10 pm:

      Hi Nick,
      I’ve been looking at MVP myself, looks like a nice little niche they occupy, and have good margins, and decent growth prospects. However I agree that it looks overvalued, and under my numbers, probably about 50% higher than I would consider fair value. I had to be a bit creative in my growth projections to get a valuation approaching the current share price – this is always a warning sign for me.

      Strong management ownership (even a majority ownership) is something that I look for in undervalued companies. This helps me feel more comfortable about alignment of interests, and also about potential catalysts for value-realization through management buyouts. I find looking at the ownership structure over long periods (who owns the big blocks, etc) more useful than looking at the short-term changes however – sometimes you will see management buying only token amounts (generally <$10k), and this can be more of an IR/PR exercise than a true indication of undervaluation.

      I think it is useful to look at all the large owners in a name to get more of an idea of who your fellow business partners are, what their investment horizons are likely to be (out at the first sign of trouble, or susceptible to a fund redemption, or another company in the same industry etc), and what their intentions might be (examples include TOX holding ~15% of DMX prior to a full buyout; NCI and Bennamon (essentially a wing of Visy; TPM and iin, etc). As Marty Whitman puts it, it's all about conflicts and communities of interest…

      These days I see more investment opportunities in not-so-nice companies that could undergo asset-conversion operations than in great companies operating as a going concern and trading at a significant discount to IV. Let me explain that a little more – there's a lot of excess capacity in the world, and in industries with low rates of growth, a company's capital allocation decisions are becoming limited – organic growth will only exacerbate already stressed industry-wide supply/demand dynamics. Therefore, if a company wants to invest it's excess cash flow, it is better off buying market share than growing by capex. Essentially, I expect more market consolidation activity in certain low-growth industries (mostly manufacturing industries) with excess free cash flow, so looking at the share register and the capital structure has become an important part of my investment process.

      Selling is the hardest part of this gig, so having another indicator is always useful.