Where do retail investors typically search for shares in which to invest or to add to a watch list? Financial websites like TheBull are filled with articles highlighting the opinion of brokers and analysts on potential investments.
While analyst opinion is for many an indispensable starting point, retail investors need to constantly remind themselves opinions are just that – opinions. By law, some analysts are prevented from translating their opinion into the action of buying shares.
Insider buying, on the other hand, can represent real conviction on the part of someone within the company that the shares will go higher over time. Insider buying is action, not opinion.
Those of you who check into the Premium Edition of theBull daily know we provide you with a list of insider buys and sales reported to the ASX within the last few trading days. That list should be the retail investor’s “best friend.” You can use Insider Buying announcements to both confirm analyst opinion on a share and to uncover shares trading “under the radar” of the analyst community. Let’s look at two examples.
A recent article on TheBull raised the question of why analysts are still so high on shares of Matrix Composites & Engineering (MCE). Here is how the article posed the dilemma for retail investors:
• Having previously been the market darling – surging 900% in just 18 months post listing – Matrix Composites & Engineering has been hit hard; its share price has plummeted by 59% over the past six months. While brokers were bullish on Matrix back when its shares were basking in the glory of $10 a share, they continue to be bullish today as the share price crawls across the bottom of the price chart, currently sitting at $3.59. Investors want to know whether this stock is a true bargain.
Retail investors who heeded analyst opinion in the glory days of MCE and bought should now be wondering why they should trust analyst opinion to buy more at the current lows? Those who sold out wonder whether or not to get back in. Insider buying can help answer the question of whether or not MCE is really a bargain.
Insider buying is reported to the ASX as an Appendix 3Y – Change of Director’s Interest Notice. To get the details simply enter the stock code into the quote box in TheBull’s market data section, click the drop down box to select ‘ASX News’ and click ‘Go’. (For now you can just click on this link to get news for MCE).
Not all insider buying represents a real clue. You are looking for real buying, not issuance of options shares, or shares issued as part of a dividend reinvestment plan or as part of a share buyback. The Nature of Change section on the Appendix 3Y will give you that information.
What you want to see is a director who put his or her money on the table to buy shares, either on market or off market. An off market sale is a direct arrangement between buyer and seller while on market transactions go through the exchange via a broker, a superannuation fund, or trust fund.
The Appendix also tells you the name of the purchaser as well as how many shares were held before the transaction and the size of the current transaction.
What can Insider buying tell us about Matrix? On 22 September 2011, Paul Richard Wright, a company director, was named acting Chief Financial Officer (CFO) in the wake of the resignation of the existing CFO.
On 06 October 2011, the trustee for his superannuation fund bought 43,600 ordinary shares of MCE in an on market transaction, bringing his total shares in the company to 2,260,308. The cost of the buy was $130,382.
When using insider buying as evidence of the potential of a share you have to evaluate the credentials of the purchaser. This is especially true in the case of single purchases. The ASX news does not list any other insider buyers in the last several months. So who is Paul Richard Wright?
Reuters provides brief biographies of the executives and directors of publicly traded companies and here is what they had to say about Mr. Wright.
• Mr. Paul Richard Wright serves as Acting Chief Financial Officer, Acting Company Secretary and Non-Executive Director of Matrix Composites And Engineering Ltd since September 22, 2011. Mr. Wright is a qualified accountant with direct experience in the accountancy, as well as in a commercial context companies involved in heavy engineering. He was previously the Chief Financial Officer and Company Secretary of Matrix, and Managing Director of Centurion Industries Limited which was formed as a result of an employee buyout of the Tomlinson Steel operations. Mr. Wright is a member of the Audit and Risk Management and Remuneration Committees.
This tells us Mr. Wright knows his numbers. Approximately two weeks after assuming the position of CFO he invested $130,382 into the company. This alone is not reason to buy, but it is evidence of someone who should know having enough conviction about the company’s potential to risk his own money.
Similarly, insider selling may also give you clues. Again, using MCE as an example CEO Aaron Begley sold $3 million worth of shares in early April at almost $10 a share. MCE shares dropped more than 60% in the following months.
Although it is hard to keep this in mind in these days of gut-wrenching market volatility, at some level retail investing should be not only profitable, but fun. There are few things more exhilarating than discovering a share few market participants are looking at. Insider buying can be a way to spot these “under the radar” shares.
On 12 October 2011, TheBull’s Who Is Buying Their Own Stock listing included a buy of close to 2 million shares of a company called Medical Developments International (MVP). Unfortunately, when you check ASX News for the Change Notice, you learn it was actually a share issuance through the company dividend reinvestment plan made to the chairman of the board – David John Williams.
However, if you look down the news list you find other notices, dating back to May of 2011. Dr. Anthony Coulepsis bought 15 thousand shares on 14 September and another 10 thousand on 6 October, bringing his total to 410 thousand shares.
Director Maurice Van Ryn bought 40 thousand shares on 02 June and another 20 thousand on 20 September, bringing his total to 1,243,898 shares.
Another director, Dr. Harry Oxer, added 10,500 shares on 27 May 2011 and an additional 2,500 shares a few days later, bringing his total to 140,000 shares.
On 30 August 2011 the chairman, David John Williams, added 1,015,000 shares bringing his total to over 27 million shares.
Although there is currently no analyst coverage of this company, these men obviously believe in what they are doing and the share price has stayed solid throughout the turmoil – it’s up 16% over the past three months and 92% over the past year. What’s more, MVP actually pays a small dividend.
This kind of insider buying from several key individuals is no guarantee of a successful investment. But it wouldn’t hurt to add this share to your watch list. And for those with appetite for high risk, additional research into company fundamentals might even warrant an investment.
Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au.You should seek professional advice before making any investment decisions.