Anthony Kavanagh | Portfolio Manager, Chester Asset Management |
“In the race of life, always back self-interest – at least you know it’s trying” Jack Lang
Anyone who has listened to my colleague Rob Tucker in the past 12 months would most likely have heard the above quote and hopefully appreciates a key part of our research effort and ongoing portfolio (+watchlist) management is monitoring insider activity. It is something we constantly review in real time but every 12 months we take a helicopter view and provide some thoughts on emerging patterns.
September is an interesting time to perform this exercise, as it seems to have heightened activity for insider dealing with windows open following August reporting season. It also seems to be the season where insider dealing hits the headlines, last year for the comprehensive management selling of A2 milk (A2M) and dealings of then Cleanaway (CWY) MD Vik Bansal, this year due to share sales by Nuix (NXL) insiders and Vaughan Bowen.
Conscious that we appear to be going down the Marvel track with another sequel (I promise we’ve got an original piece coming) but frankly we love franchises, they make great business and in a world of increased uncertainty the information content from insider dealing is enhanced. Hence for the very reason described in the quote above it remains one of our favourite screens.
As noted in our publication last year, Why it Pays to follow the Insiders, empirical studies have shown the significant alpha created from following insider activity but for us it is much more than that. Before ESG was investing du jour we’d been reviewing remuneration reports and insider activity as it goes to the heart of the governance of an organization.
Herein we provide an update on some of our 2020 observations and provide some fresh areas of interest in 2021. For those that are time poor we’ve chosen to present our 2021 observations first, with an update to our 2020 observations following.
The table below highlights the Top 10 share sales and purchases of the ~ASX300 in FY2021 and top 5 in FY2022 to date. As a reminder and for those wanting to perform their own analysis we note this data is sourced by Chester (company by company) from MarketIndex.com.au (rather than Bloomberg) and engineered into the following tables.
Source: Chester Asset Management with data sourced from MarketIndex.com.au
Sources: Chester Asset Management with data sourced from MarketIndex.com.au
In addition to the list above we try to highlight some recent observations / examples of 2021 Chester decision making from insider activity.
Technology – Ignore the signals?
6 of the top 10 in FY2021 and 4 of the 5 companies in FY2022 to date are in the technology space. In addition, we noticed on Friday last week (24/9/2021) Craig Scroggie, MD of NextDC (NXT) had sold AUD21.7m worth of stock.
We present this comment here merely as an observation as we appreciate that a number of these firms are founder led (a trait we are extremely attracted to) and those founders have material portions of their wealth tied up in these firms that they may understandably be trying to diversify from. Notably the 3 biggest outliers to performance from the FY2020 sell list were technology companies so we suggest the strength of the signal may be a bit weaker when it comes to identifying sells from the tech space.
Pokie permabull or big green flag?
Endeavour Group (EDV) is a name we need to update our database for but for us is a bit like our UMG comment of 12 months prior in that it is a business that recently demerged from its parent entity, being Woolworths (WOW) and has experienced material insider activity. UMG’s buying was material in number of transactions and although we note 6 separate instances of buying in EDV this month, it is the quantum of buying by Bruce Mathieson (Snr) at >AUD50m that has captured our attention, in a similar vein to Twiggy’s FMG buying in FY2020.
EV material companies – Let’s not forget the cycles
We are big proponents of the EV trade and structurally bullish the play but some of our preferred exposures in the space have seen material insider dealing of late that we find hard to ignore, for a sector that has had its fair share of past cycles. Pilbara Minerals (PLS) saw the MD Ken Brisden sell half his stock over 2 months ago, a week after sales by 2 other directors. 2 months later corporate ‘insider’ Mineral Resources (MIN) also sold its stake in the business. Lynas Corporation (LYC) has also seen recent selling by the MD Amanda Lacaze.
On a separate but somewhat related note we have seen a company (we have really liked) complete a partial divestment of their key project and seen the market (sell side analysts) misinterpret the economic structure of the deal such that they are inflating the implied look through of the deal by double! That’s material and it shouldn’t have been hard to work out but in this lithium bull market some people are believing what they want to believe.
Conversely there are other EV related exposures where we have seen material insider buying like Jervois Global (JRV) where at least 3 directors participated in the recent entitlement offer related to the acquisition of Freeport Cobalt.
But overall, we suggest some caution on the valuation of some of the EV related exposures at present.
The ‘Book Deal Trade’
We have seen a ‘trade’ somewhat repeated in markets of late we are coining the ‘Book Deal trade’, or BDT for short. The first of these we witnessed recently was ex Regis Resources (RRL) MD Mark Clark. We are conscious he wasn’t the first MD to do this but it has been noticeable that this trade was repeated by a string of other successful gold MD’s. Why we have coined it the ‘Book Deal trade’ is the historic precedent of either the Australian Cricket Captain or POTUS to financially leverage their brand power post retirement in signing a book deal, that instantly becomes a best seller.
These MDs had specifically identified companies/ assets when chief of their prior organisation and upon retirement joined that company as a Director with an accompanying placement. It is almost the purest form of legal insider dealing we can think of.
Source: Chester Asset Management with data sourced from IRESS
In the table above we have highlighted that these BDTs have all achieved stunning day 1 results. These are some of our favourite MDs in the gold space and we have enjoyed tremendous success investing alongside of them so are more than understanding of the share price responses. A successful strategy is clearly knowing which companies are about to sign a ‘book deal’ and investing in them but it can be challenging to ‘chase’ these initial pops. However, the subsequent follow-through in Capricorn Metals (CMM) and Venturex (VXR) suggest buying in even after the initial rise has still generated strong returns.
Limiting this to just gold MDs does ignore some of the other executives who have achieved comparable success in prior roles. The most obvious being tech entrepreneur Bevan Slattery who has enjoyed similar market responses to his investments into the likes of Rent.com.au (RNT) and Pointerra (3DP).
We are extremely interested in one BDT that hasn’t generated the same types of returns (as yet) but has similar potential to the ‘gold edition’ of the club:
- It is a project that has been around for years and enjoyed a level of scepticism from parts of the market but has enormous upside
- The new MD is highly regarded
- He is accompanying his appointment with a placement of AUD 2m of shares (~4x his new base salary)
Unlike the other additions maybe because his appointment followed a large capital raise there is still ‘surplus’ stock floating around but we are somewhat surprised to see the pull-back in price to date. For those that haven’t yet guessed we are talking about Seafarms Group (SFG) who recently appointed the ex Inghams (ING) and Skilled group MD Mick McMahon as their new leader.
As an added kicker to this BDT, Mick was joined by his prior CFO from ING Ian Brennan who is also investing AUD500k into the company. The kitchen knives of this insider deal? The Chairman Ian Trahar invested AUD20m in the recent placement and converted loans totalling AUD15.2m he had with the company into equity.
Consumer Staples – A hive of activity
We have noted above (and below) observations related to A2M, UMG, EDV and SFG. We see a lot of activity in Consumer Staples, and maybe because there’s greater cyclicality in agribusiness the signal strength on this activity feels greater than the ‘secular growth’ of the technology space so worth considering.
Although we think a host of companies in the space are enjoying a second consecutive season of near perfect conditions and hence set up for a strong FY2022 including Elders (ELD) we make note of the recent activity of MD Mark Allison who has sold over AUD7m of stock within the last 12 months. As a side note we believe he has done an outstanding job with his part in turning around that business.
Conversely a name we think is going through a transformational turnaround of its own that we feel remains underappreciated is Ridley Corporation (RIC) where we have witnessed 4 instances of Director buys in FY2021 including over AUD400k by Chairman Mick McMahon. In a similar vein TGR has attracted some buying from insiders including director James Fazzino who continues to buy in almost every available window.
The FMG 180
Although past the cut-off date for our data, we note that on Friday (23/9/21) it was announced Fortescue (FMG) MD Elizabeth Gaines had sold AUD9.4m worth of stock in on-market trades. Material in itself and a significant portion ~2/3 of her non LTIP shareholding. As noted below, in previous versions of our annual screen Twiggy’s buying has often placed FMG in the Top 10 buy lists. Maybe time for Twiggy to wade back in?
The ultimate insider trade?
At Chester we are avid voyeurs of financial Twitter (FinTwit) and we were quite intrigued by the debate earlier this month around news Federal Reserve (Fed) regional presidents Robert Kaplan and Eric Rosengren would sell all of their stocks by September 30, refer article here. The argument posited being that QE has had a very positive impact on markets and as the Fed talks of potentially talking about tapering if it did actually action that talk it could have a detrimental impact on the stock market. I’m trying to keep this note short so suggest anyone wanting to jump down that rabbit hole does so at their own leisure but we are intrigued by this thought that it could possibly be the ultimate insider trade. We certainly hope not.
2020 Observations Update
The tables below represents the same information as above but for FY2020. Notably there are a few similarities to the FY2021 list in that there appears a disproportionate level of sells from the technology space and a higher level of buying in the resources space.
Source: Chester Asset Management with data sourced from MarketIndex.com.au
60% of the time it works every time
If we start off with the sells, the 2 bookends are notable in highlighting that insider activity can be both an extremely useful red flag and a deceptive indicator to follow. In the case of Phoslock Environmental Technologies (PET) allegations of fraud followed <12 months after the initial director sales so were worth paying attention to. In the case of Kogan (KGN) however the stock price appreciated >250% in the 12 months following the initial director sale. Demonstrating the screen is useful as part of a decision making process but challenged as a standalone decision trigger.
Sources: Chester Asset Management with data sourced from IRESS
Although not specifically on this, or the FY2021, list due to the data only capturing ASX director selling we had noted the material disposals of multiple A2M insiders in August 2020 as something that left us ‘cautious on the outlook for the company’. It was clearly one of those red flag rather than false flag moments with the shares down >60% in the 12 months following those sales.
Be like Twiggy
The variance of alpha across buys from FY2020 presented a similar set of results to the sells, highlighting the intricacies of insider activity as a screen. It’s more an art than a science but clearly we would all love to have Andrew (Twiggy) Forrest’s trading prowess (and financial resources)!
Sources: Chester Asset Management with data sourced from IRESS
Above we have noted one of the material insider trades we correctly identified in 2020 but it would be remiss of us not to mention a couple of others we had identified as potential buys from activity in FY2020 being OceanaGold (OGC) and United Malt Group (UMG). Both are yet to work out but have seen ongoing insider buying in 2021 and remain holdings of the fund.
Breaking somewhat from the tradition of past notes we are linking to a Livewire article we read on the weekend, never send a suit to do a founder’s job.
Although as discussed in our previous note, where we covered a number of reasons for Founder-led firms outperforming, we wouldn’t want to be seen to be copying other articles, as has happened to us in the past, so refer you to the linked article above.
It was almost apt that after publishing our note last year two of the highest attributors to the fund and some of the more successful IPOs in FY2021 were founder-led firms. Where possible we continue to favour founder-led firms and watch with envy across some of the founder-led firms we haven’t been invested in.
Despite mixed success in predicting alpha from the 2020 cohort, insider dealing remains as important a screen as ever. Remain alert, remain flexible and remain curious. Good luck and hopefully there’s a book deal in the future for us all to look forward to.