Saturday, January 31, 2009

Are Directors Buying Shares In Their Own Companies?

Before deciding whether to buy shares in any given company, there are a number of things I look at. One of things I check out is what the insiders are doing. By this I mean looking at whether the directors of the company I'm interested in have been buying shares recently (or maybe selling shares instead). Since I invest on the Australian stock market, I'm able to find this information fairly easily as companies listed on the Australian Stock Exchange (ASX) are required to report directors transactions to the market.

So why should I care whether the directors are buying or selling shares? Well, the directors of any listed company have (or maybe I should say "should have") a pretty good idea of the prospects of their business. If they're buying shares then it's probably a sign that they are comfortable with the future of the company and see value in its stock at the prevailing market prices. Similarly, if you notice that a director is selling shares in their own company, it could be a sign of trouble to come - maybe they consider the stock to be over valued or they could be anticipating weakness in the business in the future. However, this is by no means foolproof. It's entirely possible that the director is selling just because they need to money for something else.

One of the more interesting Change of Director`s Interest Notice's issued last week was for Harold Mitchell who bought 295 thousand shares in Mitchell Communication Group Limited (ASX Code MCU). Mr Mitchell now holds in excess of 83 million shares in the company. The purchase price was around 45 cents per share and compares to a current price of 33 cents. MCU has traded as high as 99 cents in the last year after peaking at over $1.40 in 2007.

Mitchell Communication Group is a diversified media group and from what I understand, Harold Mitchell is known as a mover and shaker in the media buying industry within Australia. The most recent purchase is one of a number of recent acquisitions of MCU shares by Mr Mitchell.