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Directors are buying these renewable energy shares – should I?

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One of UK renewable energy share that has attracted a lot of attention from investors in recent years is ITM Power (LSE: ITM). Some of those investors lately have been the company’s own directors. There has been a spate of director share purchases this month. Here I look at why that might be, and whether it tempts me to add ITM Power shares to my own portfolio.

Directors are buying renewable energy shares

When directors buy or sell shares in listed companies, the stock exchange is notified. That can be a useful source of information for a private investor such as myself. Directors typically pay close attention to the performance of the company on whose board they sit, as well as the broader industry in which it operates. So when a director spends their own money buying shares in a company, it can suggest that they see a potential disconnection between the market price and what they think is its fair value.

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At ITM Power, directors have been scooping up shares in November. Over the past fortnight, the chair, chief executive, chief financial officer, and technology head have all bought ITM shares. Four other directors also made purchases. The size of these transactions ranged from £20,000 to £250,000.

Why are directors buying ITM Power shares?

Though directors are required to register transactions in their company shares, they don’t have to disclose their reasoning for such purchases.

Typically, I see buying shares as a sign of confidence in a company’s future. I think that is more likely to be true when executives dip into their own pockets to fund the purchases, as here, rather than getting them as part of some sort of incentive scheme. Share buying can also be an intentional signal to the market of director confidence. That can reassure the wider investor community.

I don’t know why so many ITM directors decided to buy shares in a short time span. There has been a positive news stream from the company lately. It could be that the directors are feeling buoyant about ITM’s moves towards commercialisation at scale and developments such as funding for a windfarm development. ITM’s technology is well regarded and could help fuel substantial company growth in future, or attract a takeover bid.

I’m still not persuaded ITM is for me

ITM’s directors seem upbeat about the company’s prospects. But that doesn’t necessarily mean it is a good fit for my own portfolio and risk tolerance.

There are moves to scale up the company’s commercial pathways. Those include deals for new electrolyser sales and a plan to build a second factory. But the company’s current revenue remains small. Even if it increases dramatically as orders come in – which is not guaranteed – there is still a risk that turning revenue into profits will be difficult. That’s a common challenge in young industries. If the business space looks profitable, it could spur new entrants, further hurting ITM’s pathway to profitability.

Given the sizeable risks involved, I don’t think ITM merits its market capitalisation of £2.8bn. For that sort of valuation I’d like to see stronger sales already and a more robust confirmed sales pipeline. Even though directors have been buying ITM Power shares, I won’t be adding them to my portfolio.

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Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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