1. Skin in the game

When a director commits their own cash to purchasing company stock on-market, they are aligning their own financial interests with those of other shareholders through the common ownership of stock. This is a very important sign in all cases because it shows that are not solely interested in the wage their directorship provides, but see great value in the future equity success. In many cases, a meaningful position purchased on-market will pay off many times the wage their job provides.

This example can be seen in companies such as Thorney Technologies (ASX:TEK) where director Alex Waislitz bought shares on 7 seperate days in the 1 month ending 18 January 2023. He has made numerous more purchases before this period too. For the sake of simplicity, let's solely examine the on-market trades in the below announcements.

These change of director's interest filings (Appendix 3Y) must be lodged as soon as a director's ownership of company securities/interests change, so keeping a close eye on these is important. For this example above, we know that Alex Waislitz has spent $570,907.53 making these purchases, which is interesting because Thorney Technologies' annual report for FY22 shows that he doesn't actually receive a wage!

Talk about shareholder alignment. Safe to say that Alex sees any potential director wage as insignificant if Thorney's assets pay off and their share price rerates.

But we should also keep in mind that not all on-market purchases by directors are equal. This is because the size of the trade will depend on the director's financial capacity; therefore, a $200k purchase for a billionaire director will be a far less material investment compared to a $50k trade by a cash-strapped, not-so-rich director. In Thorney's case, although it is obvious that Alex has shown us absolute conviction in his company's underlying value, we must also note that he is a tech billionaire from a wealthy family and not reliant on this money to pay off the mortgage one day. We should also take care when reviewing Appendix 3Y releases that the shares acquired are paid for via cash, and not issued for free.

2. All about timing

Most companies have both good and bad periods so the challenge for investors is timing the market. Forutunately, a director buying shares is a great signal that they believe that the stock is about to go on a good run. After all, director's don't have a bottomless bank account and they need to make sure their investment can payoff in the shortest time possible.

For investors, when we see the kind of trade, we can examine what catalysts exist for the company in the near term. This, combined with the trading behaviour, can indicate whether the director will expect the outcome to be materially positive or not.

A great example can be found in lithium mine developer Liontown Resources (ASX:LTR). The company is currently subject to a protracted takeover defence with Albemarle who sought to acquire the company for A$2.50 per share, as announced on 28 March 2023. Yet Chairman Tim Goyder acquired almost $1.5m of Liontown shares on 20 January 2023 for ~$1.31 on average.

This was an interesting event as although Tim Goyder already had a huge stake in Liontown, he was not a regular acquirer of shares on-market. So this timing was a great signal to the market that Tim expected the next few months to be highly positive for Liontown's share price. Unsurprisingly, in two short months later, this parcel of purchased shares almost doubled in value. The share price chart tells this story clearly.

Although not every instance of on-market purchases by directors is indicative of such a drastic payback, it does however give us reason to dive further into what likely events exist that the director is bullish on. For Liontown's Tim Goyder, there was numerous examples of large Chinese, European and American battery metals companies acquiring upstream mining assets, with Liontown being one of the few independent assets left for purchase. Furthermore, their mine construction was well underway and would likely be a highly profitable operation at prevailing commodity prices in its own right, in addition to near term cash flows + synergies should they be acquired.

3. Backing the expert

A director running the company is naturally privy to additional insider information us external investors wouldn't know. Although there are strict rules around how they can trade i.e. blackout periods, we can still assume that they'd be more informed as to whether the company's technical capabilities are likely to pay off in the long run.

For example, biotech companies are often run by scientists with extensive backgrounds and industry connections. The nature of their experience and insight into the company they run will no doubt provide them with more information as to whether their compound is likely to succeed in trials. In the case of Kazia Therapeutics (ASX:KZA), several of their directors have been purchasing additional shares in the last 24 months:

This behaviour is interesting as almost the entire board has been periodically purchasing additional shares in Kazia despite the share price more than halving in the last 12 months, with some shares purchased at well over $1 per share (vs 18c currently). Yet a quick look into these director's backgrounds reveals an extensive list of experience and perhaps indicates that they professionally believe in the technical foundations of Kazia's assets despite share price headwinds.

4. Reputational tailwind

When a prominent director purchases shares on-market, the company benefits from that director's reputation which signals to the market that they are positive about the company's prospects. This is highly valuable in the professional industry where investors tend to back director's who have picked winners in the past.

An example is Daniel Tillet who was Executive Director and Chief Scientific Offier for Race Oncology (ASX:RAC) and oversaw its share price grow from ~$0.11 at the time of his appointment (17 September 2019) to the board to ~$2.00 at the time of his resignation (24 March 2023). During this period, he purchased additional shares 15 seperate times and was well loved by retail investors for his leadership and effective investor communications.

Daniel later joined the board of Simple Solutions (ASX:SIS) - the company's share price rose as high as 60% on that same day.

Closing considerations

Once we have gotten the data on trades and context around relative "skin in the game", we'd be able to get a good sense of how important equity success is to this management team. But remember, this shouldn't be viewed in isolation as some highly motivated directors simply don't have the financial capacity others do to make these sorts cash commitments. As such, we need to examine all the signs as a whole to determine whether a company is a Triple Threat.

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