Backing Their Own Ability

"The time to buy," said Nathan Rothschild, "is when blood is running in the streets." My taxi driver this week had never heard of Baron Rothschild, the great 19th century financier, but he did want to know when the smart people buy stocks.

The answer is '¦ all the time. But some times are better than others. The ASX200 has retreated about 9% since it peaked at 5364.5 on May 11. By any standard, the sharp decline in the local stockmarket, which has driven valuations below long-term historical levels, is a “buying opportunity” and Australia's best financial minds '” from directors of blue-chip companies to colourful entrepreneurs '” have been snapping up stock over the past few weeks.

Eureka Report has surveyed all stock purchases made by company directors in the seven weeks since the correction began; the results provide a clear snapshot of the bargain-hunting now being carried out by market insiders. (To ensure an accurate picture, the survey excluded transactions linked to “paper money” such as options and related instruments, and instead looked exclusively at “on market” transactions).

For private investors it's worth noting that a range of academic studies have shown that stock prices generally trend higher after company directors “buy in”. After all, who knows the company better than the people who run it? Moreover, rather than signalling insider trading, the vast majority of stock purchases by company directors indicate confidence in the future profitability of the company.

At the top end of town, several blue-blood chairmen have been digging deep into their own pockets to buy company stock. The outstanding example is Don Argus, the former chief executive of National Australia Bank who is now chairman of BHP Billiton and Brambles.

Argus spent close to $1 million last week to buy 38,000 shares in BHP. Argus, who has overseen BHP’s turnaround under former chief executive Paul Anderson and now Chip Goodyear has already profited from his transaction. No doubt the wily former economist views his purchase as a long-term investment.

Argus also bought $198,000 worth of stock in Brambles, the diversified pallets group ,which is trading at a much higher price/earnings (P/E) multiple than BHP (28.2 times against 15.7) '” although clearly Argus believes Brambles’ stock remains worth buying at about $10.54.

Eureka Report is a big supporter of listed investment companies (LICs) and Argus is also on the board of one of the oldest LICs, Australian Foundation Investment Corporation (AFIC). In his spending spree of recent days, Argus also spent $168,000 to buy 65,000 shares in the Melbourne-based AFIC, which is chaired by Bruce Teele.

Long term investors will also be interested to see another legend of banking and mining circles, John Uhrig '” a former chairman of CRA (now Rio Tinto Australia) and chairman of Westpac '” has also been actively buying stock during this volatile period. Uhrig is the chairman of the telecommunications technology stock Codan. Uhrig made a relatively substantial investment in this “small cap” stock on May 30 and 31, when he spent $373,000 to buy 393,000 shares in the company, which has been trading on the ASX since 2003.

As market veterans such as Argus and Uhrig were placing their faith in BHP, Brambles, AFIC and Codan, some of the market's leading chief executives were also digging out their chequebooks to invest in their own careers.

Among the outstanding transactions in this category was the 100,000 shares in Salmat ordered by Philip Salter, the managing director of Salmat on June 1. Salter spent $279,000 of his own money on Salmat stock in a very public vote of confidence in the direct mail group, which has fallen from grace over the past year as it failed to match investor expectations.

Salmat hit rock bottom when it lost a key catalogue contract with Coles Myer on May 12. Within weeks, Salter's faith in his own management was rewarded: the highly regarded value manager Maple-Brown Abbott became a substantial shareholder of Salmat June 16.

Eddie Groves, the founder and chief executive of high-flying child-care operator ABC Learning, has also shone during the dark days of the correction, although Groves and ABC Learning are not the same outstanding investment they represented a year ago. ABC’s return on equity is shrinking to poor levels and many questions are being asked about management standards at newly acquired childcare centres. Nevertheless, Groves is expected to drive strong profit growth at his company in the coming years. He was the biggest single “director investor” in the course of the correction (to date), buying $2.7 million worth of stock in the week ending May 14.

Macarthur Coal managing director Ken Talbot also made a defiant stand while commodity stocks were being widely sold off, buying $990,000 worth of his own stock on May 31.

At the top end of town, AMP managing director Andrew Mohl paid about $500,000 for 58,000 shares in the resurgent financial services company on June 15.

Max Moore-Wilton, a controversial and notoriously hard-nosed manager, is also no doubt a hard-nosed investor. Moore-Wilton stepped in and bought 100,000 shares in Macquarie Airports for $296,000 in the last days of May. Moore-Wilton is clearly in the money since Macquarie Airports has '” in common with most infrastructure funds '” been among the best performers during the correction.

Also in Macquarie Bank's sphere of interest, Simon Jones, the long-time chief executive at Macquarie Countrywide Trust, took advantage of the sell-off in the heavily US-dependent listed property trusts to pick up 108,000 shares for $200,000.

Inside infrastructure, but outside the Macquarie dragnet, Phil Green, the chief executive of Babcock & Brown Infrastructure, was the second-biggest single director investor of the correction, splashing out $2.26 million for 1.5 million Babcock & Brown Infrastructure shares on June 14.

For investors in listed equity funds, the correction has been particularly demanding, since these stocks had not lifted with the broader market earlier this year. However, the masterminds behind one of the biggest listed fund management groups on the ASX were also quietly buying stock in recent weeks.

David Coe, the boss of Allco Equity Capital '” one of the market's biggest listed private equity funds '” spent $115,000 on Allco stock on May 14. If investors were happy to see Coe continue to support Allco, many would have been, riled to watch the actions of David Hendy, non-executive chairman of Funtastic. Hendy has the unwanted distinction of being one of the very few chief executives selling his own stock “on market” into a correction.

Hendy sold 440,000 shares in the toy and consumer durables group Funtastic on May 12, during the worst correction for three years. No doubt Hendy has reasons for his sale '” as CEOs in these situations always have. But long-term investors will be very disappointed to see these sales.

One of the biggest “related party” purchase orders that went through during the correction was posted at badly hit US-based construction group Rinker. Rinker director David Clarke, a former executive director at CSR, dug deep into his pockets and spent more than $1 million buying 493,00 shares in the stock.

Though the actions of leading chairmen, chief executives and directors will serve as a key pointer to value in ASX stocks over the course of the correction, related transactions by well known market players may also act as a useful guide to stock valuations in the coming weeks.

Among the stand-out transactions in this group was freewheeling entrepreneur Geoff Lord. Lord is a former Elders IXL executive who is no doubt tired of that particular tag. Nevertheless, association with John Elliott-era Elders is being progressively reassessed in the light of the later careers of Patrick chairman Peter Scanlon and Robin Elstone, the surprise victor in the ASX /SFE merger, who will now head the merged enterprise.

Lord, who has many interests across the stockmarket, paid about $500,000 to greatly beef up his investment in life sciences company Institute of Drug Technology.

Smaller deals were studded across the market from some of the market's best known 'players' such as star stockbroker Greg Bundy, who bought 25,000 shares in life sciences stock Peptech.

Two of the technology sector's most colourful characters were also snapping up stock: serial technology entrepreneur Fred Bart bought 20,000 shares in Electro Optical Systems, the entrepreneurial scientist behind “junk DNA” company Genetic Technologies, Mervyn Jacobson, bought $34,000 worth of his own stock, and Chris Kyriakou '” a veteran speculator from mining booms (Walhalla) and the dot-com craze (Kids.Net) '” bought $22,000 worth in one of his newest ventures, mineral exploration company Investika.

Finally, one of the biggest public commitments to a company from one of its own directors came from the highly speculative uranium sector.

On May 27 a director of Deep Yellow, Gillian Swaby, spent $70,000 to buy 1.8 million shares. The entire capitalisation of Deep Yellow is just $78 million.

To put her buy into perspective, Don Argus would have had to spend not $1 million but $83 million on BHP shares to make the same commitment. Either way, both Argus and Swaby have invested their own money in their own abilities and that's the sort of commitment we like to see at Eureka Report.

• With research by Howard Belcher's Newsbites share information service. From June 26, Eureka Report's weekly Prospector column will be reviewing share dealings by directors and institutions.