Posts Tagged ‘insiders’

The herd is buying Telstra

Saturday, December 9th, 2006

Today, this article, Telstra rise surprises even its biggest boosters, caught our eye. Ever since Telstra?s T3 receipts were listed in the stock exchange, it had risen from its offer price of $2 to last Friday?s close of $2.51. That?s a growth of 25.5% in just three weeks! From what we learnt in that article, sentiments seemed to be turning in favour towards Telstra again (or maybe towards telecommunication companies globally in general). Major brokers like Macquarie, Citigroup and ABN Amro have been upgrading their recommendations for Telstra.

We find this rather amusing.

Not long ago, while Telstra?s T3 receipts were being offered to the public, the crowd were scoffing at Telstra. The mood against that company was one of anger, disgust and ridicule. As we said before in Is the Telstra T3 offering worth a buy?, our advice is: get even, not mad with Telstra. Joining in the mob mentality is not going to do ourselves any favour when it comes to making investment decisions that require rational thinking. Before we decide whether to invest in any business, we should be making a meticulous evaluation on its merits and the maximum price that we are willing to pay for it. After we invest in the business, we should stick with it, unless new facts, evidences or developments have emerged to undermine the intrinsic worth of the business.

But as we can see, the market is often tossed and turned by every whim of emotions. It is very amusing to see those major brokers suddenly changing their minds about Telstra at about the same time. There are now talk that the Telstra share price was undervalued, implying that the government had sold it too cheaply. We guess the insiders who bought Telstra shares probably saw that fact too (see Insiders buying Telstra). As a result, the crowd are now rushing back to buy Telstra shares.

But dear readers, how much of Telstra?s intrinsic worth had changed since the T3 sale? Not one iota! Since the basis for Telstra?s long-term future had not changed within that space of time, why did those major brokers suddenly change their mind? Had they fallen asleep behind the wheel and suddenly wake up to find the beauty of Telstra?

We prefer not to disclose our cynical theories here.

Insiders buying Telstra

Saturday, November 25th, 2006

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.