One of the more commonly used strategies by investors is to follow insider transactions. That’s something even the legendary super investor Peter Lynch did. In his book One Up on Wall Street, Lynch shared investing checklists that he had used and one of the criteria was this: “Whether insiders are buying and whether the company itself is buying back its own shares. Both are positive signs.” Consistent insider purchases may indicate that a company’s management thinks that the stock is undervalued. They could be wrong of course, but companies that have seen insiders buy shares consistently are still worth some further research….
One of the more commonly used strategies by investors is to follow insider transactions. That’s something even the legendary super investor Peter Lynch did.
In his book One Up on Wall Street, Lynch shared investing checklists that he had used and one of the criteria was this: “Whether insiders are buying and whether the company itself is buying back its own shares. Both are positive signs.”
Consistent insider purchases may indicate that a company’s management thinks that the stock is undervalued. They could be wrong of course, but companies that have seen insiders buy shares consistently are still worth some further research.
Meanwhile, it’s worth noting that insider selling need not mean that bad news about the company is around the corner – there are many reasons why insiders may want to sell.
With these in mind, let’s take a look at two companies that have recently seen insiders buying shares, or in other words, putting their money where their mouth is.
1. JB Foods Ltd (SGX:BEW)
JB Foods is a major cocoa ingredients producer in Malaysia with almost three decades of experience in the business. The company’s products include cocoa butter, cocoa liquor, and cocoa powder. The bulk of its sales (88%) are made in Malaysia, with the rest coming from Singapore (8%), the United States (3%), and Indonesia (1%).
Over the past week starting from 29 February 2016, Goh Lee Beng, an executive director of the company, had been purchasing shares of the company on various occasions. All told, she had bought 150,700 shares for a sum of nearly S$38,000, pushing her total stake in the firm up from 53.02% to 53.08%.
JB Foods’ shares closed at S$0.25 yesterday and is valued at 19 times trailing earnings. The company had just released its latest results two weeks ago for the quarter and year ended 31 December 2015.
There was a big turnaround in the company’s operations – despite mediocre sales growth of just 3.6% to US$227 million in the year, the loss of US$13 million seen in 2014 had become a profit of US$2.36 million. The cash flow picture also looked much better as an operating cash outflow of US$23 million in 2014 had turned into a cash inflow of US$9.2 million.
But, the firm also sounded out a note of caution in the earnings release, commenting that trading volatility in cocoa bean terminal markets is expected to be high. Moreover, while the company thinks that cocoa and chocolate consumption “is resilient,” it noted that there may still be negative impacts on consumer demand if economies around the world are to weaken.
2. Sin Heng Heavy Machinery Ltd (SGX: BKA)
Founded in 1969 as a company providing lifting solutions, Sin Heng now has two main business segments: Equipment rental and Trading.
The former provides rental services for cranes and aerial lifts. The company also provides turnkey project engineering services for its clients to complement its crane rental services. The Trading segment, as its name suggests, sees Sin Heng trade new and used cranes and aerial lifts. It also sells and distributes spare parts that are used in cranes and aerials lifts.
On 15 February 2016, Tan Ah Lye, the non-executive chairman of the firm, had bought 200,000 shares of the company for a sum of S$90,000. With the purchase, Tan’s interest in the company had increased from 28.12% to 28.29%.
Shares of Sin Heng were last traded at S$0.44 yesterday. At that price, the company is valued at 13.6 times trailing earnings.
In late January this year, the company issued a profit guidance and announced that it was expecting to make a loss in the quarter ended 31 December 2015. True enough, when the results were released around a week later, the company saw its quarterly profit of S$4.8 million in the previous become a loss of S$2.1 million. A big 61% year-on-year plunge in the firm’s revenue to S$22.3 million had played a role in the loss.
In the earnings release, the company’s outlook for the near-term future was brief but worrying: It expects to “face difficult challenges ahead” due to the “weak macro environment and political situations in the regional countries.”
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.