Insiders buying Telstra

November 25th, 2006

Share |

In Peter Lynch?s book, One Up on Wall Street, he said:

There?s no better tip-off to the probable success of a stock than that people in the company are putting their own money into it … When insiders are buying like crazy, you can be certain that, at a minimum, the company will not go bankrupt in the next six months. When insiders are buying, I?d bet there aren?t three companies in history that have gone bankrupt near term.

Generally, insiders? buying is a good sign, though it is not absolutely infallible. When you look at the legal disclosure on directors? share acquisitions, you can see that there are many types of purchase, from share purchase plan, dividend reinvestment plan, exercise of company options, on-market purchase and so on. Not all types of purchase are significant. The important distinction you have to make is that whether the director is using his or her own money to buy the share. If they use their own money, the next thing to look at is whether they are buying significant amounts of it?so much so that they will feel the pain if their company does not do well. Even better, if a significant number of the directors are doing the same, it is an even stronger tip-off. Finally, do not get carried away with one or two isolated incidents of such activity?stay calm and note the trend before jumping into conclusions too quickly.

Today, we saw this article in the press?Sol Trujillo (and Belinda Hutchison as well) put his own money to buy T3. Upon checking the other directors? transaction, we found a couple of interesting information. On 22nd August this year, one of the non-executive directors, Peter Wilcox, bought 20000 Telstra shares at $3.45 on the market when it was near its low point. Another interesting fact to note is that his current holdings of Telstra shares comprise 88% of his annual remuneration. Another non-executive director, John Zeglis, bought 16500 shares on the 3rd November at $3.99. His current holdings comprise 51% of his annual remuneration.

These signs are encouraging. At the very least, they are not negative. But as with all information, it is not wise to base your investment decision solely on insiders? buying information. In Telstra?s case, they are certainly interesting. We will be watching the trend of insiders? buying for this company.

Tags: , ,