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 I’ve chosen at random from a list of companies that have recently seen insiders buy shares.
1. Multi-Chem Ltd (SGX: AWZ)
Multi-Chem started life in the 1980s as a distributor of PCB (printed circuit boards) chemicals and materials. Today, the company’s business is different – it’s still distributing specialty chemicals and materials to PCB manufacturers, but it’s also providing drilling services. As of 30 June 2016, Multi-Chem has 134 mechanical drilling machines and 22 laser drilling machines.
On 14 September 2016, Multi-Chem’s chief executive Foo Suan Sai bought 26,900 shares of the firm for S$13,988. The purchase had pushed his total stake in the firm up slightly from 68.04% to 68.07%. Foo’s wife, Han Juat Hoon, happens to be Multi-Chem’s Chief Operating Officer and also a substantial shareholder of the firm; Foo’s total stake in the company includes the shares owned by Han.
Multi-Chem’s share price closed at S$0.54 yesterday. At that price, the company is valued at 10.4 times trailing earnings.
In its latest reporting quarter (the second-quarter of 2016), Multi-Chem’s total revenue slipped by 6% year-on-year to S$80.3 million while its net profit slumped by 31% to S$1.64 million. The larger decline in Multi-Chem’s bottom-line is due to weakness in its PCB business in Singapore and the cutback in spending from its customers.
2. MTQ Corporation Limited (SGX: M05)
MTQ is an engineering services provider in the oil and gas industry. For some background, the business of MTQ is organised into three main operating units: Oilfield Engineering, Engine Systems, and Neptune.
On 9 September, a company called Readymix Holdings International Pte Ltd had bought 150,000 shares of MTQ. MTQ’s lead independent director Nicholas Campbell Cocks is deemed to have an interest in any shares of MTQ held by Readymix. As a result of the transaction, Cocks’ total interest in MTQ was bumped up from 0.05% to 0.15%.
Then on 15 September, Cocks sold his direct holdings in MTQ (comprising 50,200 shares) to Readymix at a price of S$0.41 per share. The transaction did not change his total interest in MTQ, but rather shifted ownership from his own personal accounts to those held under Readymix.
MTQ has suffered in recent years as a result of the fierce decline in the price of oil. The latest reporting quarter (three months ended 2016) for the company was more of the same. Total revenue declined 24% year-on-year to S$45.78 million. The company also clocked a net loss of S$2.1 million, an improvement from the loss of S$2.3 million seen a year ago.
The company’s chief executive Kuah Boon Wee highlighted in the earnings release that MTQ is “operating with a cost-conscious mindset.” But, he warned that “a return to profitability requires growing revenue and that remains a challenging goal for this financial year.”
MTQ’s shares closed at S$0.40 each yesterday. At that price, the company has a price-to-book ratio of just 0.6.
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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.