Stock Takes: Why insiders' trading is worth watching

Air New Zealand shares, which opened at $1.89 today, have fallen 30 per cent since mid-April. Photo / Brett Phibbs

Insider trading has a bad name, quite rightly, but it's important to remember it can be completely legal.

Senior managers and directors of listed firms are permitted to buy and sell shares during trading "windows" over the course of the year.

Given that they can't help but have the best insight into a stock's potential trajectory, it pays to keep a close eye on market disclosures flagging this kind of activity.

Executives and directors of Moa Group, for example, were snapping up shares in June and early July.

Since then the craft beer stock has gained 42 per cent to open at 90c this morning.

Similarly, selling by insiders can be a strong signal that it's time to jump out of a stock.

A case in point is Air New Zealand, a number of whose executives were selling shares like Armageddon was approaching late last year and in early 2016.

Chief financial officer Rob McDonald sold around $2 million worth of stock in October and December.

Those trades took place as the share price rallied towards the record close of $2.88 it hit in late January, in anticipation of the record annual profit the national carrier reported last month for the 2016 financial year.

Then in April and early May, executives including CEO Christopher Luxon, chief operations officer Bruce Parton, McDonald and chief pilot David Morgan sold over $5m worth of shares.

These trades were taking place against the backdrop of a less rosy outlook for the national carrier's current (2017) financial year - the result of reduced foreign exchange hedging benefits and increased competition.

Broker reports show there was a growing awareness among analysts as early as late last year that the airline's 2017 profit would be lower than the 2016 result.

But as far as Stock Takes can tell, Air New Zealand first communicated specific information about the 2017 outlook at its May 3 investor day, well after the executive team's April trading flurry.

Air New Zealand shares, which opened at $1.89 today, have fallen 30 per cent since mid-April and 36.5 per cent in the year to date.

The airline is the third worst-performing S&P/NZX 50 stock this year, after Tower and NZ Refining.

Wealth transfer?

One market source, who requested anonymity, described the executive share sales as a "wealth transfer".

"I look at this and say, 'Who was the winner out of all of this?' It wasn't the other shareholders was it?'"

Air New Zealand chairman Tony Carter said the executives' awareness of the 2017 outlook was "no greater than investors" at the time the trades outlined in this column were made.

Explaining the trading, he said senior managers were not permitted to buy or sell in the lead-up to the firm's interim result, reported on February 25.

He said trading also wasn't possible while discussions were taking place on the sale of the airline's shareholding in Virgin Australia - a four month period - and
during the sale process of the stake.

"The increase in long term incentive plan (LTIP) participant trade sales disclosed to the NZX following this unusually long blackout period reflects both a backlog and short trading window which would have otherwise seen the sale of shares spread more evenly across the financial year," Carter said.

Watch closely

Mark Lister, of Craigs Investment Partners, said the trading by Air New Zealand executives simply highlighted the importance of keeping a close eye on insider share sales.

"All you can really do is watch and factor that into your decision-making," he said.

"Watching what directors and company insiders are doing always gives you a pretty good handle on how things are going ... plenty of people around the world base some of their investment strategy on what the insiders and company executives are doing."