Insider Trades & Share Buybacks: How to Take Advantage of Them
BY VICTOR CHNG,
Value investors typically screen stocks based on business or financial criteria that must meet certain standards. There is however another screening method we use from time to time when screening for undervalued stocks – share buybacks (or share repurchases).
Share buybacks can come in two forms. Firstly, a company itself can use its own money to buy back its shares. With less shares in the market, earnings per share will increase. When a company does repurchase its shares, it usually means something along the lines of, “We find no better investment than our own company.”
Secondly, insiders (directors or substantial shareholders) can use their own money to buy their company shares. This to me usually indicates that the management feels that the shares are undervalued or the company is going to perform well in the near future. Although there are many reasons why insiders may sell, there is only one reason why they would use their own money to buy the company’s shares: they think it’s undervalued and its share price will rise.
Between company or insider buybacks, I prefer the latter, because this means these insiders are risking their capital and putting their money where the mouth is. And when the buybacks are substantial, it usually implies a lot confidence in their stock.
If you use Share Investor, you can take a look at a company’s insider trades and see if there is any heavy insider trading. If you there is, it is best you still analyze the company’s fundamentals and valuation before plunging right in.
Let’s further elaborate this with an example:
If you have noticed the share buyback activities by ABR directors and Lim Eng Hock (more famously known as Peter Lim, the Remisier King) from September 2011 to 27 April 2012, you would have picked up the company and start analyzing it. During its 2012 AGM, the management announced they were going to sell one of their subsidiaries and the proceeds gained from the sale distributed to shareholders.
If you bought ABR at $0.58 in September 2011, you would have made a 51.7% gain in your portfolio in just one year (including a $0.30 special dividend). Therefore next time, take a look at insider trade activities – you’ll never know what gems you may find.Earning Disclaimer
“Please note that the material here is provided to you for general information and illustrative purposes only, or as descriptive case studies on how our value-investing principles may be applied. It is not intended to be and should not be construed as any form of general or specific financial advice. For the avoidance of doubt, we do not recommend or provide opinions on how or what you should or should not be investing in, and you should always do your own research and independent assessment before making any investment decisions, taking into account your own specific circumstances. If you require any financial advice on investments or any other financial matters, please consult the relevant professional financial advisers.”