Company directors tend to know their businesses well. So, their purchases and sales of company stock are notable. Recently, I spotted some really interesting director dealing at a FTSE 250 company. Here’s a look at the trading activity and my take on it.
A new FTSE 250 arrival
The company in focus today is the recently-listed Dowlais Group (LSE: DWL). It’s an engineering business that has a strong focus on the automotive sector. Spun off from Melrose Industries, it operates through three main businesses: GKN Automotive, GKN Powder Metallurgy, and GKN Hydrogen.
Now, what’s interesting here is that between 20 June and 22 June, five directors at Dowlais bought stock.
Among those buying were:
- CEO David Butterworth
- CFO Roberto Fioroni
- Chairman Simon MacKenzie Smith
The largest purchase was from the CEO, who snapped up 410,548 shares at a price of £1.21 per share, spending just under £500,000 on stock.
In total, the five directors bought around £800,000 worth of company shares.
This trading activity looks quite bullish to me.
For starters, multiple directors have purchased shares. This buying pattern, which is known as ‘cluster buying’, is typically very positive.
Second, top-level insiders have bought stock. Research shows that top-tier insiders such as CEOs, CFOs, and Chairmen tend to be better predictors of future stock performance than insiders who are lower down the corporate hierarchy.
Third, the directors have invested quite a bit of money here. This suggests they see a real opportunity.
A value play
Now, insiders tend to be value investors. And I can certainly see value on offer here.
At present, City analysts expect Dowlais to generate earnings per share of 13.8p for 2023.
That puts the stock on a forward-looking P/E ratio of just nine, which is well below the market average.
It’s worth noting that in May, analysts at Stifel initiated coverage of the stock with ‘buy’ rating and a price target of 175p. That’s nearly 40% above the current share price.
As for business performance, the company appears to be doing quite well right now.
In a recent trading update, the group advised that for the four-month period to the end of April, it generated adjusted revenue of £1.9bn, up 9% year on year.
Looking ahead, management said that bookings were healthy and that it was growing more confident of achieving adjusted operating margin expansion for the full year.
“We have had a very encouraging start to the year. As markets continue to recover, we are increasingly confident of delivering sector leading financial performance, based on our proven financial model and continued execution of our restructuring programs. We remain excited about the future,” said Butterworth.
Worth a closer look
Of course, insider buying doesn’t guarantee that a stock is going to perform well.
Sometimes, directors are too optimistic in relation to future business performance.
However, the risk/reward skew here looks attractive, to my mind.
I think this FTSE 250 stock is worth a closer look right now.