Director (insider) trading

Director buying

Looking at companies where directors have recently bought shares can be a good way to find ASX shares that may be worthy of further investigation. Company directors are often the people most familiar with a company, its value, and outlook. This is why director trading is sometimes referred to as insider buying or selling. Where a director buys shares on-market this can be  a sign they think the share price will appreciate in future. If multiple directors are buying, especially larger amounts, that is a better sign. It is not, however, a guarantee that the share price will rise, so further investigation should be conducted.

Often multiple directors will buy company shares after a significant price decrease, possibly because they think it has been oversold and offers good value or perhaps because they want to show confidence in the company. There should not necessarily be any hurry to buy shares after a steep price decline, even if directors are buying. Sometimes it is worth waiting to see how it plays out.

Directors may purchase or receive shares as part of corporate actions such as share purchase plans or rights issues, or as part of employee incentive schemes. They may also participate in dividend reinvestment plans. Sharp Investor looks at the trades where the director has bought or sold on-market as well as off-market trades (depending on the situation), as these trades are usually the most telling.

Director trades are disclosed to the public via ASX announcements in the form of Appendix 3Y notices. Directors must disclose trades within five business days after the trade.

Share selection

To use director trades as part of our share selection process, we look at companies with multiple directors buying in the last thirty days. We take high director buys, say two or more, with no or few sells over the last six months, and combine this with other favourable share selection criteria to form a list of stocks for further investigation. For example, we may combine high director buying with undervalued stocks and/or stocks that are trending up in price. See our director trades data for the last six months here.

Director selling

Directors can sell shares for many reasons – they may wish to diversify their investments, need money for tax payments, or as part of a family court settlement. Maybe they founded and grew the company, listed on the ASX and now want to cash in. This is something you should examine, especially in companies you own. If a director sells shares in a company you own shares in, it may prompt you to review your position. Have a look at the Appendix 3Y and see how many shares the director still owns in the company – sometimes the sale may be a very small proportion of their overall holdings.

In monitoring director trades we have observed that director sells rarely occur in low P/E ASX shares where the price is trending up. Usually directors sell where the share has a high P/E ratio and/or has no earnings. Director sells often take place after a sharp rise or good run in the price.

Summary
  • Multiple director buys are a good way to find potential shares for further investigation whereas shares with directors selling will likely be less compelling.
  • Director buys are not a sure sign to invest, especially after sharp price decreases on bad news.
  • Director sells may prompt a review if you own the share, but check the reason for the sale and how many shares the director has left afterwards.