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Should you follow directors in buying these 2 stocks?

Photo credit: Rafael Matsunaga. Licence: http://creativecommons.org/licenses/by/2.0/

Many investors believe that directors’ share dealings are predictive of future movements in share prices. After all, it’s the company’s management who should have the most insight into the outlook and strategy of their company. And if a company’s directors put more of their own wealth behind the company’s shares, surely it shows they have confidence in the company’s future.

But while directors’ dealings can be a useful indicator of when to buy and sell shares, that’s not always the case. Directors may benefit from an information advantage, but they can also suffer from confirmation biases and end up making bad investment decisions. After all, they’re only human and they make mistakes just like the rest of us.

Below, I’ll take a look at whether investors should follow directors into buying Laird (LSE: LRD) and Barratt Developments (LSE: BDEV).

Profit warning

Laird’s shares have lost more than half of their value since the start of the year, as the wireless technology company warned of very challenging trading conditions in its Performance Materials division. Because of delays in the smartphone cycle and uncertainty in demand from mobile device manufacturers, the company lowered its expectations for full-year underlying pre-tax profits to around £50m, down from £73 million last year.

A turnaround won’t be quick or easy, but Laird’s chief executive and the chief financial officer seem confident given their latest share purchases. CEO Anthony Quinlan and CFO Kevin Dangerfield took advantage of the latest profit warning to purchase 20,000 and 10,000 shares, respectively.

It’s difficult to tell whether these two directors are trying to shore up confidence in the company’s shares or genuinely believe its shares are undervalued. Personally, I think the stock does offer real value and reasonable turnaround prospects. Laird is currently trading at 11.2 times its much reduced 2016 expected earnings, which gives investors a wide margin of safety and plenty of potential upside if a turnaround does indeed materialise.

Right now, the stock is even cheaper than in the immediate aftermath of the profit warning, with shares in the company trading at 155.4p, around 8-9% less than the price the directors paid.

Brexit hit

Directors in Barratt Developments seem to be optimistic about their company too. On 21 October, chairman John Allan purchased 20,000 shares, while non-executive director Richard Akers bought 10,000 shares.

The housebuilder, like most of its sector peers, was badly hit by the Brexit vote on 23 June, and shares in the company remain well below their pre-Brexit peak of more than 673p in September 2015. Despite this, city analysts are relatively sanguine about the earnings and dividend prospects of the company. After a 22% rise in underlying profits in its 2016 financial year, they expect the company to report a mere 4% decline in earnings this year, with forecasts of a 7% recovery for the following year.

These forecasts imply shares in Barratt trade on a forward P/E of 9.0, with valuations falling to just 8.4 times on its forecast 2018 earnings. Moreover, given robust cash flow generation and a robust balance sheet, because of resilient residential property prices in the UK, shares in Barratt have a prospective dividend yield of 7.4% for 2017 and 2018.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.