Buy Hold Sell: 3 stocks directors have been selling (and 2 big buys)

In this episode, IML's Michael O'Neill and Auscap's Will Mumford analyse three big director transactions of the last few weeks.
Buy Hold Sell

Livewire Markets

Millions of dollars of shares are sold and bought each month by company directors. Often, investors watch these transactions as a signal that leadership teams know something we don't. So should you buy or sell if leadership teams are too? 

Firstly, there are a variety of reasons (or maybe excuses) why a director may sell stock in their company. Take tax reasons, for example, or divorce settlements (half of all first marriages end in divorce, after all), or just because they need the cash - to purchase a new home or holiday house, for instance.

Of course, it could also mean these directors think their company's shares have run too hard - or that there are troubles on the horizon that the rest of the market doesn't know about, yet. 

Interestingly, FirstLinks found that companies tended to perform worse if there had been director selling over a six-month period than companies where no director sales had occurred. 

That said, there's only one reason a director would buy shares, and that's because they think their stock's share price is about to go up. 

So in this episode, Centennial Asset Management's Matthew Kidman was joined by Auscap Asset Management's Will Mumford and IML's Michael O'Neill for their analysis of three stocks where director selling has occurred over the past month. 

Plus, to even the score, they also name one stock they have been buying on the back of reporting season. 

Note: This episode was filmed on Wednesday 6 September 2023. You can watch the video, listen to a podcast, or read an edited transcript below.

Edited Transcript  

Matthew Kidman: Welcome to Livewire Markets' Buy Hold Sell. My name is Matthew Kidman, and with the end of reporting season, the insiders, the people who run companies and sit on boards, are out of their blackout. What does that mean? They can buy stock or they can sell stock. There's only one real reason why you want to buy stock - which is because you think you're going to make money over the long term and there are a lot of reasons, maybe excuses to sell stock. 

And that's what we're going to concentrate on now - the companies and directors that have been selling stock and whether that's a good thing or whether we can see through it into the future. So to discuss the stock selling today, we have Will Mumford from Auscap and we've got Michael O'Neill from IML. 

Michael, I'll start with you. A market darling that had a pretty good result was JB Hi-Fi. But it also had a bit of director selling. Buy, hold or sell?


Michael O'Neill (HOLD): It's a hold for us. It's been over-earning due to COVID, so sales are still up 36% above pre-COVID levels. However, there's a lot to like in terms of the scale of the business, their cost of doing business advantage, and the rent that they pay per square metre, which is similar to anchor tenants like supermarkets. So for us, it's a standout in the discretionary space. It's still growing market share and we'd be interested at the right price.

Matthew Kidman: Top-notch retailer, but has the music stopped for JB Hi-Fi? Buy, hold, or sell?

Will Mumford (BUY): I'm happy to keep backing JBH. So I think it's a buy. Terry Smart (the group's CEO) sold just about enough to cover his tax liability from the shares he was issued. So it just shows that he is rational. And Nick Wells (CFO) still has $2 million worth of shares, which for a mid-cap CFO is at the higher end. I think they've got some cost pressure that they're going to need to manage over the next 12 months, but they've got a really good track record of delivering. For me, the key thing is they're a category killer and they're moving into increasingly less discretionary categories, but it's still trading at a discount to the broader market and to the consumer staples retailers.

Evolution Mining (ASX: EVN)

Matthew Kidman: Gold. Everyone likes the glitter of gold. Evolution Mining, buy, hold, or sell?

Will Mumford (SELL): Well, we don't own Evolution, so for me it's a sell. Firstly, I just think the end uses of gold are less practical than other commodities and I think that's going to lead to growing ESG pressure for the sector. The sector also has issues with grade declines as well as cost pressures because it's a very labour-intensive mining process. And thirdly, the sector just doesn't really screen as cheap as other commodities to us right now. And Evolution's debt is probably higher than I'd like as well. So I'm happy to stay on the sidelines there.

Matthew Kidman: Evolution's been a great performer over the years. Grown a very big gold company, which is not easy to do. A little bit of selling. Buy, hold or sell for you?

Michael O'Neill (HOLD): I agree that Evolution has done well. It is an unhedged exposure to gold mining and fair to say it's at a point in time where we're near record gold prices, but it is a quality asset. They've got a diversification of production across four main assets, they've got a low all-in cost of mining and they've got a little in the way of CAPEX ahead of them. One of their assets, Ernest Henry in particular, has copper deposits alongside the gold, which means for every ounce of gold you mine, you're taking copper with it effectively. You've got a negative extraction cost.


Matthew Kidman: So let's turn to blood. Gold to blood. CSL is obviously one of the really big companies in Australia and it has been a tremendous performer, but it has been a bit tougher more recently. Some of its older directors who have been around for a long time were selling some stock. Buy, hold or sell?

Michael O'Neill (BUY): Buy for us. They've delivered a strong result. They've reiterated their outlook for the coming year. If we look at their performance in terms of growth across their key plasma categories, they've shown growth across all products. They've also shown that they can deliver on the Vifor acquisition. We're excited about the prospect of higher yield initiatives in plasma collection and we're also excited about the prospect of a new drug that might address recurrent heart attacks.

Matthew Kidman: So this company's been a core portfolio holding for most Australians over the last decade. Insiders are selling a bit of stock, should we trim as well? Buy, hold, or sell?

Will Mumford (SELL): Well, personally, I don't own the stock, so I'm going to say sell. I think the Vifor acquisition is of lower quality than the rest of CSL's portfolio. In general, I get a bit nervous about step-out acquisitions, also about management turnover soon after large acquisitions. The valuation also looks reasonably full to me, so that's another one where I'm happy to be on the sideline.

Matthew Kidman: Okay. Those are stocks where directors have been selling. Give us one that you've been buying that you like at the moment.

Will's Pick: Mineral Resources (ASX: MIN)

Will Mumford: One that we've been buying is Mineral Resources and for MinRes, the story isn't about whether directors have been buying or selling, it's about the size of their stake. So Chris Ellison (Founder, MD) has a $1.6 billion stake within MinRes and that tells you a few things. Firstly, it tells you he knows what he's doing. He's become a billionaire through the performance of MinRes. Secondly, it's going to give you better alignment than the design of the best long-term incentive (LTI) scheme ever could. So MinRes has again and again come up with opportunistic and entrepreneurial transactions that you just don't see at many other ASX-listed companies. So it's a good reminder to back founder-led businesses.

Matthew Kidman: Okay, Michael, what have you got? Something that you've been buying as opposed to what these directors have been selling?

Michael's Pick: Steadfast (ASX: SDF)

Michael O'Neill: I'll give you one that we've been buying and the chairman has been buying, which is Steadfast. Frank O'Halloran's been buying. I think he bought 55,000 shares. So this is a company that's just provided guidance for 10% to 15% earnings growth for the coming year. That's a level that it's generally achieved through the decade that's passed since its IPO. What gives them confidence in giving that guidance is organic growth through market share in their insurance broking network, roll-up acquisitions in the network and the hard insurance market that we're in today, which isn't going away anytime soon. You could also have another catalyst at their upcoming AGM in October when they start to talk about the US strategy in more detail.

Matthew Kidman: There you go. Some of the directors are selling. These two gentlemen are steadfast in what they're buying. Another terrific show. A lot of good content, and a lot of good stock tips. What you should do is go out and subscribe to the Livewire YouTube channel and there's a lot more content to watch.

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