Put your money where your mouth is

The old saying that "actions speak louder than words" is so true. In fact didn't a great philosopher suggest that actions meant everything and words nothing? Was it Aristotle?

Over recent days the Chief Exec and Finance Director of Avesco have been purchasing shares in the company. About £16000-£17000 worth between them. Not a massive sum, but a vote of confidence nevertheless, particularly when they have just released impressive quarterly results with an optimistic outlook statement. Directors were also buying large tranches of shares at lower prices.

It's great to see Directors back up their optimism with their own hard earned cash.

In fact I make it a rule never to invest in companies where the Directors can always see a bright future, but don't own many shares in their own company. "Never mind the b***sh*t, just put your money where your mouth is".

When Directors start selling shares it is also a good time to review your own position and the company's prospects. Whilst there are many reasons why a Director may want to sell e.g. needing the money for a property purchase, just needs some quick cash etc.  I always ask myself, why don't they find the money from elsewhere? If you truly think that your company's prospects for the near and longer term are looking great, and that the share price will rise as a consequence, then surely you'd make every effort to hold on until you felt they were fairly valued or overpriced?

Alarm bells should certainly be ringing when a Director tells you that the future is rosy, and then suddenly sells his/her shares into a rising share price. Surely this doesn't happen! Unfortunately it does. In fact a couple of years ago I held shares in a company that I considered to have recovery potential. At the interim results the Chief Exec clearly indicated that recovery was just around the corner. The shares began to rise and he sold most of his holding into the rise almost immediately. You can probably guess the rest. Yes that's right, recovery wasn't just around the corner, and in fact it probably never will be. I did sell at a loss, but a great lesson was learned.

Anyway, good news at Avesco. Directors buying, robust trading and at the moment Disney owe them $60m (and rising). Also EPS forecasts for 2012 give a single digit forward p/e ratio. Given the current growth, the share price looks very miserly, and gut feeling tells me that they may outperform in 2011 and 2012.