When directors’ dealings matter (and when they don’t)

The JSE requires directors of listed companies (and their major subsidiaries) to disclose any purchases, sales and – more recently – any change in encumbrances on their holdings (like taking out a loan with their shareholding as collateral).

Because directors’ remuneration often includes share options or other such equity-linked components, the JSE’s Sens feed is littered with announcements of these so-called ‘director dealings’ and, to be honest, most are little more than announcements of past remunerations schemes being exercised and disposed of.

Listen/read:
Do director dealings matter?
Should investors be concerned when company directors make large share purchases?

So which director dealings should matter to an investor?

The trades where insiders use their discretion to trade in their own shares stand out to me. This is particularly true for transactions of size.

I would pay less attention to directors selling shares, as there can be many reasons unrelated to the company or the share price for a director to need money (they are people too!).

From their daughter going to university to getting a divorce to approaching retirement age and estate planning (all answers various directors have given me at different times for their own sales).

That said, there are two instances where I would sit up and consider director sales as being meaningful:

1. When the seller is the company’s founder, and
2. When the transaction is really big.

Even more so if it is both.

WeBuy, we sell …

An example of this is WeBuyCars Holdings co-founders’ recent sales of around R866 million worth of shares at a volume-weighted average price of approximately 4 627 cents per share.

Even though the founders still apparently hold about 5.8% of WeBuyCars shares, the size of this exit understandably spooked the market and the share price has fallen sharply to its current mid-2 000 cents range.

Read: WeBuyCars snaps up 49% of GoBid for R377m

A founder exiting in size signals both concern for the investment’s prospects by a hyper-knowledgeable insider and potentially leaves a corporate rudderless without a strong, active and incentivised insider holding the reins (holding the board to account). Neither are good.

That said, judging director sales is a tricky business and it does not always send clean signals.

Opposing this, a director buying a large chunk of their own shares using their own cash and in the open market sends only one signal: they see it as a good investment.

This is even better if the director is already a large shareholder.

Consider Aspen Pharmacare founder, CEO, and large shareholder Stephen Saad’s large on-market buying spree of Aspen shares after the share price collapsed when the group’s mRNA contract dispute was announced.

The bulk of the Saad’s buying was at around R120 a share, and about a year later the share price is comfortably hitting 52-week highs at nearly R150 a share.

Watch/read: Stephen Saad on building Aspen and leading through pressure

There have been some other large on-market, cash-based directors’ dealings over the past year, from Bidvest’s CEO to, more recently, Clicks’s CFO.

All buying shares on-market like the rest of us, all using their own cash, and all doing so out of their own discretion.

In my opinion, it is these types of director dealings that send the strongest signal on what they – as a well-informed insider – think about their own company’s investment prospects: bullish!

* Keith McLachlan is CEO of Element Investment Managers.

* McLachlan and portfolio managed by him may hold shares in Aspen Pharmacare, WeBuyCars, Bidvest and Clicks.