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.” That’s because 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…
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.”
That’s because 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 buy shares, or in other words, eating more of their own cooking.
1. Hour Glass Ltd (SGX: AGS)
Established in 1979, Hour Glass runs mono-brand and multi-brand retail boutiques that sells luxury watches. Some prominent brands that are found in Hour Glass’s stores are Patek Philippe, Rolex, Audemars Piguet, and IWC, just to name a few.
Currently, the company is the official retailer of over 50 watch brands and has a network of more than 40 stores in the Asia Pacific region. The company has a presence in six territories, including Singapore, Australia, Hong Kong, and Thailand.
Dr. Jannie Chan Siew Lee, who is currently a non-executive director of Hour Glass (she is a co-founder of the company and was previously its executive vice chairman), had bought shares of the company on four separate days in the month of April so far. In all, she acquired a total of 99,300 shares for nearly S$75,000. As a result, her total stake in Hour Glass had increased slightly from 48.409% to 48.423%.
Hour Glass’ shares closed at S$0.75 yesterday and carry a trailing price-to-earnings (PE) ratio of 9.1. In the company’s latest earnings release (for its fiscal third-quarter ended 31 December 2015), Hour Glass had registered unchanged revenue and a slight 2% decline in net profit. The company had warned in the earnings release that “Headwinds in the global economy are expected to dampen consumer sentiment and demand for luxury goods, including watches.”
2. Fragrance Group Limited (SGX: F31)
Fragrance Group is engaged in real estate development and the ownership and management of hotels. The company has had a track record of successfully launching and completing “more than 70 projects” across Singapore.
On 12 and 13 April, Koh Wee Meng, the executive chairman and chief executive of Fragrance Group, had bought a collective 2 million shares of the company for a sum of around S$360,000. The transactions had pushed up Koh’s total stake in Fragrance Group slightly from 85.385% to 85.415%.
As of yesterday’s market close, Fragrance Group’s shares were exchanging hands at S$0.178. At that price, the real estate developer is priced at 1.16 times its latest book value.
The company’s latest financial results (for the full year ended 31 December 2015) was not the best. Total revenue slumped by 45% to S$285.73 million while net profit crashed in tandem to S$71.35 million, down 56.5% from the previous year. Fragrance Group attributed its falling numbers to a lack of development projects and the absence of rental income from a property that’s undergoing asset enhancement works.
Fragrance Group commented in the earnings release that it is “expected to remain profitable in FY2016 taken as a whole, while the interim results may face headwinds for certain quarters.”
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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.