Take your direction from the directors

John Lee looks at the ‘messages’ sent to investors by board members’ own shareholdings

For me, one of the most important investment indicators in decision-making relates to directors’ shareholdings.

I like to see a plc board having a significant stake in its business, and I’m talking about an investment of their own resources – not just share options, although obviously these do provide an incentive.

Company annual reports must show individual director’s shareholdings at both the current and previous year-ends, so it is easy to identify annual changes.

But the serious investor needs information much more promptly than that, ideally as soon as possible after transactions have taken place.

By law, any dealings done by a director have to be reported to the company and the stock exchange shortly after the transaction has been made.

Thus, the knowledge that a director has bought or sold quickly becomes public.

My bible, The Hemmington Scott Company REFS publication, to which I subscribe quarterly, has a section on director’s dealings which I always study carefully.

What I look for in particular are deals done by a number of board members at roughly the same time – “cluster” transactions – because these send important messages to the investing community.

Clearly, a director has the inside track on knowledge about the company and an advantage over the outside investor.

Directors are legally barred from buying or selling before interim or final results, or if they are privy to important information such as a takeover approach, a favourable acquisition or the likelihood of a significant contract being won. Otherwise, they are free to make investment decisions just as we are.

To avoid any accusation of cherry-picking, I have looked back at all directors’ cluster purchases involving main market plcs wth the initial ‘A’ for the past few months. Of the 20 such companies, in no less than 15 cases the directors concerned made a clear profit on their purchases. And of the other four – Allied Zurich, Arcadia, Arjo Wiggins and Astra Zeneca – those buying at the lower end of the price range also showed a profit.

While I accept that market conditions have been reasonably favourable, the overall outcome is striking in the extreme. The moral has to be: don’t just watch directors’ lips – watch where they put their savings.

Source: Lee, J. (1999) Take your direction from the directors, Financial Times, 11 December.
© The Financial Times Limited 1999. All Rights Reserved.

Author note

I would not invest in a PLC unless the directors themselves held serious personal shareholdings in it, and you shouldn’t either. For me, the larger the better. Directors have to make their share transactions public and I watch these carefully, particularly when a number of directors of the same company are buying or selling, i.e. a cluster. This information is obtainable via the internet and publications such as FT Money and Investors Chronicle, which tabulate weekly directors’ dealings, usually with comment. Sometimes there is a good reason for a director to sell, e.g. buying a house, meeting a capital gains tax bill, etc., but usually I am somewhat sceptical.

Hardly a fool or a knave in sight

Well-publicised concern about the usefulness of non-executive directors does not worry John Lee

The long debate about the usefulness of non-executive directors tends to focus on big companies such as the Enrons and Marconis of this world. While majority opinion seems to favour an enhancement of the role and powers of non-execs, a vocal minority scorns them.

As an investor in the more established small cap stocks, somewhat different considerations apply to me. While I support the concept of non-execs, I do not exaggerate their importance, nor does their presence or absence particularly affect my investment decisions.

Many of my portfolio investments are in what I term “proprietorial” companies, which are in effect controlled by one family or individual. Here, small shareholders are in a very weak position and have to take a lot on trust.

However, far from feeling vulnerable, I usually feel much more secure, knowing that the key decision makers have their fortunes alongside my more modest pennies.

I also know that family members not in the business or who have considerable capital tied up in it and rely on dividend income to maintain their lifestyles.

The same more conservative attitude applies also to the level of directors’ salaries and options. In my experience there is little abuse of power by such directors – few “fat cats” here. Indeed, at two annual meetings I have urged increases in remuneration and the establishment of a modest option scheme.

In contrast, many directors of large companies seem to spend more time on their salaries, options and bonuses than on running the business. Excessive corporate activity and clever off-balance-sheet financing techniques pose little threat to these directors if it all goes pear-shaped because their committed shareholding is often minimal.

Having said all this, non-execs do have a role and value in small companies, and gradually their standard and independence have improved. There are still family solicitors and local bank managers who contribute little, but these are gradually being replaced by achievers with track records in other companies.

I do not look to these non-execs to act as some form of superior internal auditor, but I do hope they will debate and discuss the merits of capital expenditure or acquisition proposals. I also like to think they will consider outside shareholders in dividend policy, the requirements of modern corporate governance and of course succession planning.

In addition, I would expect them to feed in their network of contacts and professional advisers to what could still be a somewhat insular “family” environment. With this type of company I do not find it unreasonable for non-execs to be agreeable and compatible. But I would expect them in an extreme situation to stand their ground, perhaps even to the point of resignation.

Ultimately it is the executive directors who run the business and, we hope, provide the drive, commitment and leadership; my investment is essentially in their hands. Today there are few fools running established profitable small companies and thankfully even fewer knaves.

Source: Lee, J. (2002) Hardly a fool or a knave in sight, Financial Times, 1 June.
© The Financial Times Limited 2002. All Rights Reserved.

Author note

I have been on the Board of a number of public companies over the years and generally have had a happy and, I hope, constructive tenure. However, on one occasion I resigned because I was unhappy with the chairman’s attitude and his reluctance to separate the roles of chairman and chief executive. With another I was voted off by family shareholders’ proxies, when I and the other non-executives questioned certain Board behaviour. One of my favourite jokes is: ‘What is the difference between a supermarket trolley and a non-executive director?’ Answer: ‘While the supermarket trolley has got a mind of its own, you can get more food into a non-executive director.’

Read their lips and accounts

Take a look at executives’ body language, says John Lee

Leaving aside the rare knave or fool, most company chiefs take a responsible attitude to statements and comments they make on their companies’ prospects. If profits are likely to be at variance with market forecasts, then public annoncements will have to be made.

However, rather more sensitive monitoring is needed for serious investors who try to keep in close touch with the companies whose shares they hold. For example, the attitude, phrases and words of chairmen and chief executives can be important indicators for the trained observer. I like to develop a “relationship” with my investments; this is something I have achieved over the years by attending AGMs and through phone discussions after results and other announcements.

Obviously in doing this, I have not taken advantage of any inside information or something told in confidence – either for personal dealing or in writing articles.

The idea is to build a relationship of mutual trust. Then, outside the obvious restrictions, one tries to assess information and make judgments. If, for example, a normally accessible company chief fails to return calls for days and is “locked in meetings”, clearly something is up – perhaps takeover talks or a profits warning. As an investor, you need to try to make a judgment.

From my experience, good news and bad news are told in different ways. When things are going well the response to a question is immediate and often accompanied by a chuckle. When the news is bad, the reply is slower and the words more carefully constructed. The speaker wants to be truthful without causing depression or panic among investors.

One of my favourite questions when visiting a company is: “Where are you on an optimism scale of 1 – 10?” The response is often “11” accompanied by laughter, so sometimes a little discounting is necessary! I have repeatedly stressed the importance of attending annual meetings – not so much for the formal aspects but for the networking over coffee beforehand or the buffet afterwards.

You can have discussions with individual directors and the company’s advisers, all of which will help you develop a “feel” for the current scene. At the AGM of Nichols, the food and drink company, I was told by two key people before the meeting: “Of course we are still a weather-dependent company”.

Then the chairman said in his end-of-meeting statement that current trading was “OK, but we could do with a good summer.” It was not difficult to deduce that trading was somewhat below budget, but not enough to warrant a profits warning.

Conversely, at the AGM of Lookers, my favourite motor distributor, chairman Fred Maguire was jovial and buoyant over pre-meeting coffee and pastries. I noticed, too, that he was wearing a much brighter tie than normal – perhaps a good omen.

Sure enough, we were told that “profits were well ahead of last year and in execess of budget” – clearly heading for a very good year.

Investing by watching screens is all very well, but you can’t beat human contact. So get out there. Listen and observe, squeeze the flesh, study the eyes and the body language. It pays dividends if you make the effort.

Source: Lee, J. (2001) Read their lips and accounts, Financial Times, 16 June.
© The Financial Times Limited 2001. All Rights Reserved.

Author note

Tell-tell signs from executives’ behaviour.

A good prospect on paper

John Lee

The February snows had just cleared, leaving only a sprinkling on the hill-tops as I headed up the M6 to visit papermaker James Cropper near Kendal in the Lake District.

I had made a modest purchase in the company’s shares earlier that month at 164p, attracted by its fundamentals. It was clearly a “proper” business with a 5 per cent yield and net assets of 320p – just like an old-time “assets situation”. Its board is also optimistic – clearly further examination was called for.

Visiting a plc such as Cropper’s is for me part of the interest and enjoyment of serious investing – an opportunity to embrace our industrial heritage and to appreciate the role that founding families and their businesses have played in the life of their communities. Tucked away by the bank of the River Kent lies the 20-acre Burneside mill complex that is James Cropper (established in 1845).

This is one of the oldest names in papermaking. The present fifth-generation chairman, James Cropper, lives close by – the annual report (it is worth becoming a shareholder just for the quality of paper) states: “The company pays £26,250 annually to JA Cropper for the use of reservoirs to supply water to the factory premises …”.

It is a story of great commitment to a Lakeland community and of continuous innovation and capital investment – between 1976 and 1991, £43m was spent on re-equipment – today the company employs 500 people with a £30m turnover and significant exports.

There are four main divisions: speciality papers – the company is the largest manufacturer of bookbinding paper in the UK; converting – producing paper for picture frame mountings and display boards; technical fibre products – speciality non-woven materials from man-made mineral fibre, eg carbon, ceramic and glass, with a joint venture in the US plus a partnership programme with Johnson Matthey in fuel cell technology; finally a fast-growing chain of speciality paper shops – the nineteenth has just opened and 30 are planned, retailing 50 per cent Cropper products. All divisions are profitable.

When I visited, Cropper’s stock market capitalisation was a paltry £14m. It is laughable to compare all this expertise and worth with some of the “hope and prayer” resource or drug discovery stocks with comparable capitalisations, floated primarily for promoter benefit.

Yet I accept that it is all about profits earned and dividends paid. Cropper’s profits have fluctuated with a loss incurred in 2001, but the trend is now upwards. Dividends have also been solidly progressive with the annual report talking of rewarding shareholders “through progressive increases in dividends”. Hopefully it is this that should steadily move the share price forward in time – the asset worth in this family-controlled company is somewhat academic, and its location is hardly a property hotspot. There is also a significant pension fund deficit to be tackled.

Nevertheless to quote finance director John Denman, Cropper is a “robust” business, gearing is modest, major capital expenditure has been completed, and its newer technologies offer longer term spice.

I was sufficiently enthused to add to my holding after the visit – not easy given the tight market. A subsequent upbeat trading statement moved the shares forward to around 190p with the yield down to 4 per cent.

Profits growth for the year to March 2006 should deliver a price/earnings ratio of just into double figures. Not in the bargain basement short term, but hopefully a genuine “lock-away”. I personally feel much more comfortable prospecting on the banks of The Kent than The White Nile!

Source: Lee, J. (2005) A good prospect on paper, Financial Times, 2 April.
© The Financial Times Limited 2005. All Rights Reserved.

Author note

In the end I did not hold Cropper’s for more than a few months, making just a small profit, as I decided that there were more exciting opportunities elsewhere. I sold out between 175p and 225p – today, eight years later, they are around 310p, hardly the most exciting of performances. As the saying goes: ‘One day Cropper’s time will come but many shareholders will have died waiting.’

Raise a glass to a solid earner

John Lee

To Stockton-on-Tees to spend the day with Brulines “the leading provider of real-time minitoring systems and data management services for the leisure and forecourt services sectors”. This interesting, but relatively unknown, company floated on the Alternative Investment Market (Aim) in 2006 at 123p – and I have since made 11 separate purchases between 80p and 96p to build up my holding.

James Dickson, the chief executive, has been in the market, too. Last month, he bought 50,000 shares at 84p to take his total holding up to just under 4m shares – or 14 per cent of the company’s £26m market capitalisation.

Brulines’ core monitoring and information systems are installed in nearly 20,000 UK pubs – nearly one in every three – covering their drink and gaming equipment. Its fuel equipment is even more popular – being used by 60 per cent of retailers by volume, which should help the division move into profit next year. Overall, recurring revenues across the group now account for 70 per cent of turnover.

I was also impressed with the technology and the enthusiasm of the team helping to generate new opportunities. Whitbread’s Costa and Coffee Nation chains are clients and Brulines is in negotiation with Visa Europe to provide contactless payment technology in vending machines.

With pre-tax profits forecast to be £4m for the year to 31 March 2012, Brulines’ shares trade on a modest price/earnings ratio of 9 times, and offer a chunky dividend yield of 6.25 per cent.

I believe this is a solid group poised for growth. It is likely to become better known and, I hope, re-rated over the next few years – while paying a nice dividend in the meantime.

However, apart from Brulines, I have done little buying recently. With markets moving upwards, I have not spotted many really attractive opportunities, thus I have confined myself to one or two “add-ons”.

I have held Air Partner, the world’s leading air charter broker, for many years. But its shares have frequently suffered mid-air turbulence! I first bought the shares around the £2 mark in 1999, then sold some at £3 in 2001-2 and some more, from within my personal equity plan, at £11.40 in 2007. They peaked at £14 later that year.

In spite of volatile trading conditions, the company has always been cash positive and, even when issuing a cautious trading statement, indicated cash balances of £13m out of a £28m market capitalisation. I have added more at 280p and 285p for my individual savings acount (Isa).

Another “old friend” presenting an attractive opportunity was the Leeds-based property company Town Centre. Its interim results last month revealed an overall portfolio letting rate of 97 per cent, so I was delighted to buy the shares at 139p, again for my Isa, at around half net asset value and with a 7 per cent yield. They have recovered to 170p

Looking across my other holdings, four hover around all-time “highs” – Delcam, Fenner, Nichols and S&U. But there have been disappointing trading statements from Norcros – thankfully only a small holding – and, more importantly, from Gooch & Housego, following a fall in orders for their industrial lasers. However, there were good results and much-appreciated dividend increases from Primary Health Properties, publisher Quarto, and agricultural feedstuffs/country/pet stores group Wynnstay. My largest holding, Treatt – the flavours and fragrances company – also reported improving orders in January and February.

Source: Lee, J. (2012) Raise a glass to a solid earner, Financial Times, 3 March.
© The Financial Times Limited 2012. All Rights Reserved.

Author note

Brulines, now renamed Vianet, has been a tad disappointing so far but I am keeping faith; apparently some important contract negotiations have taken longer than anticipated. However, it has maintained its dividend and prime mover James Dickson has further increased his already substantial shareholding.

Anpario provides some food for thought

John Lee

A bright, warm August morning saw me snaking through the Peak District to visit Aim-traded Anpario at its Manton Wood Enterprise Park headquarters at Worksop, Nottinghamshire.

I had been aboard since buying in January at 82p, previously met chief executive David Bullen (ex-Novartis) and finance director Karen Prior, and had promised myself a visit during the Parliamentary recess.

Although a younger plc than I usually back – it was only founded in 1996 and admitted to Aim in 2005 – Anpario possesses the ingredients I look for; strong committed management, debt-free, cash-positive, growing profitably with progressive dividend, and an international spread turnover. The business “formulates, produces and sells high-performance natural animal feed additives to over 70 countries”. The sales mix is approximately 50 per cent European, 25 per cent Asia Pacific, 10 per cent Middle East Asia, 10 per cent Latin America and 5 per cent Africa. Last year saw particularly strong trading performances in Argentina, Bangladesh, Japan, Korea, Malaysia, Mexico and Turkey; future trading initiatives will focus on China and Brazil, which between them account for more than 40 per cent of world pig and poultry meat production.

A recent acquisition, Meriden, has a strong presence in China, supplying 16 of the top 20 feed mills there. Fundamental drivers should benefit Anpario; a growing world population, plus legislation working in favour of natural additives and away from antibiotic growth promoters. Additionally, the global feed market is very fragmented and although there are large players such as BASF, Bayer and Nutreco, there are also many smaller companies successful in niche additives which provide acquisition opportunties.

On my visit I was pleased to be joined by my younger daughter, Elspeth, who has a career in nutrition, for technical advice and questioning. Following a briefing with Prior, executive vice-chairman Richard Edwards (ex-Saint-Gobain), and senior technical staff we toured the relatively small freehold site, which is currently only 50 per cent utilised; Anpario operates another plant in North Yorkshire.

At about £1 a share, the company is only capitalised at £19m on a price/earnings ratio of 9.5 and its shares yield 2.5 per cent on a well-covered dividend. Provided its acquisition policy is cautious and conservative I see little downside. Five years hence it should be significantly larger, likely to be increasingly attractive to a hungry global player. I have added to my shareholding, despite it being a very tight market, and Elspeth bought for her portfolio too. Anpario’s 2012 interim results are expected on September 19.

Turning to other holdings, performance has been encouraging. No real nasties, but some pleasing performances from Delcam, James Fisher, S&U and VP with an upward re-rating taking place steadily in Smiths News.

Finally, there have been fun and games with defence flares and decoys maker Chemring. I thought I had bought well recently at £3, but a fortnight later private equity firm Carlyle made a preliminary approach and the shares surged £1. However, a profits warning this week saw a sharp reversal – so I made a speedy, modestly profitable exit at £3.28p.

Source: Lee, J. (2012) Anpario provides some food for thought, Financial Times, 1 September.
© The Financial Times Limited 2012. All Rights Reserved.

Author note

I bought AIM-quoted Anpario on 12 occasions during 2012, at between 80p and 105p. On the back of very positive results and a dividend increase, its shares have travelled well. I foresee considerable growth ahead for Anpario and then expect it to be gobbled up by a larger player.

Time at an AGM is time well spent

John Lee finds that private investors can gain a great deal if they adopt the right approach

The accepted view of company annual general meetings is that they are a necessary chore: five minutes of formal resolutions; rarely a question from shareholders; 20 minutes of light conversation and then back to serious business.

I take a rather different view and, as a private investor, relish AGMs as a real opportunity to form a view of the board members and to gain knowledge. Through attending these meeting, I have gained financially, had many amusing interludes, tucked into some excellent buffets and picked up at least one non-executive directorship.

The psychology of AGMs is important to understand. The chairman is usually apprehensive, having spent hours with advisers preparing for difficult questions that might arise. Will the recently fired sales manager turn up to wreak his revenge?

Usually, of course, nothing untoward happens and the meeting progresses without incident. The chairman relaxes, defences down. This is the ideal time for a shareholder to move into action.

Take careful note of expressions, reactions, nuances – all valuable information. If the chairman is the dominant shareholder, any lack of family succession points to a future takeover.

I recall, years ago, turning up to the annual meeting in London of Goldrei Foucard, a baking ingredient manufacturer. I came away with the knowledge that there was no next generation to the very nice chairman. So, I bought more shares – and was rewarded by a takeover within weeks.

Sometimes, you see clashes within families. At a Birmingham AGM, the chairman, while giving a carefully crafted and cautious statement on trading conditions, was interrupted by his brother who, sitting alongside, proclaimed loudly that things actually were rather better than that. They scowled at each other for the rest of the meeting.

Major institutions rarely attend AGMs (having their own private briefings) so the meetings are the private investors’ theatre. But be strong-willed. Do not waste the time in which you could be gathering crucial information by going back for a second helping at the buffet. Circulate – and make sure you stay sober.

Gaining entry to AGMs usually presents no difficulty – many companies are delighted just to have a shareholder turn up. Some have a table at the door on which sits an enormously inhibiting copy of the share register. However a look of authority, or saying rather grandly that your holding is in “nominee” names, usually suffices.

Be sure that you arrive early. Some members of the board normally do and are only too happy to talk with you, particularly if they are coming up for re-election that day.

At the worst, you might have to make do with the company secretary. But they can be a good ally to have, probably fielding any follow-up telephone calls that you might make.

The success, growth and integrity of the company (and thus your investment) is tied inextricably to the personality, abilities and ambitions of the chairman and/or chief executive.

If he owns a flashy BMW with personalised number plates, drips with gold jewellery and has ambitions to own the local football club – bad news. But a conservative car, gentlemen’s shoes, love of cricket, faded regimental tie and membership of the local school board spell good news.

I exclude from all this the 30-year-old, multi-millionaire, whiz-kid creators of IT companies on price/earnings ratios of 50-plus. These live on a different planet from me, anyway, so normal judgments and personality tests do not apply.

To sum up: attending an AGM is much more valuable than many investors imagine. It is time well spent.

Most are at a sensible time and venue. But if you are daft enough to stick with a company that holds its AGM on Boxing day in John O’Groats, then you have only yourself to blame.

Source: Lee, J. (1999) Time at an AGM is time well spent, Financial Times, 15 May.
© The Financial Times Limited 1999. All Rights Reserved.

Author note

I think this article is self-explanatory – I would definitely encourage AGM attendance whenever possible.

At least I made the buffet

Sometimes the toughest challenge is to operate the tea and coffee flasks by John Lee

Over the years I have attended countless AGMs in company offices, hotel suites and boardrooms all over the country. Too often what should be the one real opportunity of the year to build bridges between the board and the private investor becomes a rather short and soulless formal event – a lost opportunity for both.

These days most chairmen rely on a carefully honed and scripted cribsheet with even the proposers and seconders of resolutions carefully chosen and primed; usually the chairman is in a state of high tension and anxiety, wondering whether difficult questions will be asked.

For the average shareholder who bothers to attend, the biggest challenge is to operate the large tea and coffee flasks on the back table without accidentally pouring hot liquid everywhere.

Gaining access to the meeting presents little problem; by the entrance usually sits an over-awed secondee from the typing pool behind an enormously imposing copy of the share register. Waving a copy of the report and accounts, or rather more importantly, announcing that your shares are in nominee names will usually get you in.

Most AGMs are over in minutes with rarely a question asked. The chairman grandly announces that the resolution to reappoint him has 10m proxy votes in favour with only 300 against.

There are smiles and titters as everyone speculates on the indentity of the minority votes. Probably a shareholder has just put the X in the wrong box.

Occasionally one encounters an anoraked shareholder intent on asking convoluted questions from a large notepad and frequenly referring to “our company”, causing everyone to search for some obscure point about Page 23, Subsection (c).

Initially tolerant, everyone eventually gets bored then irritated until the shareholder is finally silenced by the chairman around question 8 with the offer of further discussions after the meeting.

AGMs can have their own humour; some years ago in Birmingham, the chairman, while giving a carefully crafted and cautious statement on trading conditions, was interrupted by his brother who, sitting alongside, proclaimed loudly that things were actually rather better than that.

On another occasion I remember hurrying to the Metalrax AGM. Rounding the final corner a minute before the start I ran smack into a funeral cortege moving at snail’s pace, led by a black coated attendant on foot. I missed the formal meeting, thankfully I made the buffet.

For me the AGM is an important date in the calendar – an opportunity to assess the board, to mix and talk in the margins of the meeting, adding to ones knowlege of the company and its personalities; to assess next year’s prospects and to check on issues such as dividend policy and whether there is a family succession issue.

Last year I attended the London AGM of specialist insurance broker Windsor. I liked the feel of the company and what I heard, and afterwards confidently bought more holdings. Last week’s AGM reported further progress and optimism. Between the two meetings its shares have appreciated significantly.

Companies could do much more to encourage shareholders to attend their AGMs. Apart from food and small gifts they could consider mounting product displays and presentations, perhaps with videos of activities and overseas operations. Meetings could be made much livelier and more exciting.

Private investors all too frequently miss out on this unique opportunity to gain knowledge.

Source: Lee, J. (2003) At least I made the buffet, Financial Times, 15 February.
© The Financial Times Limited 2003. All Rights Reserved.

Author note

Nothing more to add!