Directors are buying these high growth stocks – should you follow them?

Directors’ buys can be a useful indicator of the future prospects of a company. The theory goes that those with an inside knowledge of a company are unlikely to spend their hard earned cash on its shares if they don’t believe the company has a bright future ahead of it. Directors purchasing stock sends a signal to the market that those with the most knowledge of the business believe its share price will appreciate over time.

With that in mind, here’s a look at two fast growing companies in which directors have recently been buying shares.

Telit Communications

With the exception of the finance director, it’s unlikely many will have a deeper knowledge of a company than the chief executive. That’s why it’s worth noting that the CEO of Telit Communications (LSE: TCM), Oozi Cats, spent nearly £230,000 on Telit shares in September, taking his holding to just north of 20%. The director clearly has confidence in Telit, so does this mean it’s time to buy?

Personally, I believe Telit looks to be trading at an appealing level right now.

The company operates in the fast growing Internet of Things space, has grown its revenues from $207m to $333m over the last three years and has generated five-year total annualised shareholder returns of a huge 32% per annum. And after a sizeable correction in the share price of late, Telit can now be bought for a low multiple of 11 times FY2016 earnings, if analysts’ forecasts of 25c earnings per share are accurate.

Recent results for the half year ended 30 June saw revenue growth of 6.3%. And while adjusted profit before tax was lower than last year on the back of continued R&D efforts and setbacks in the ramp-up of certain products in the US, it’s expected that the company should benefit from typically strong seasonality in the second half of the year.

While a director putting his money on the line is no guarantee of future performance, at the current share price I believe Telit offers an attractive risk/reward skew.

Hikma Pharmaceuticals

The only thing better than one director purchasing shares in a company is multiple directors loading up and this is exactly what has happened at Hikma Pharmaceuticals (LSE: HIK) recently.

Three directors, including chairman and chief executive Said Darwazah, vice-chairman Mazen Darwazah and non-executive Ali Al-Hursy spent over £12m on Hikma stock in September, taking the opportunity to build a dominant stake in the company as the share price has slumped. 

Hikma’s share price has fallen dramatically since trading at around 2,700p in early August, after comments from US presidential candidate Hillary Clinton about the escalating cost of drugs has sent the sector lower and Hikma reported a drop in operating profits in its half-year results.

However Hikma is viewing 2016 as a “transitional year” after a string of significant acquisitions in the last few years and has stated that the company is “building a strong pipeline to support future growth.”

Earnings may be volatile in the short term while Hikma integrates its recent acquisitions, but with the share price falling 25% in two months and the company now trading on a P/E ratio of 17, for those willing to ride out the short-term earnings weakness, I believe it could be worth following in the directors’ footsteps and building a position in Hikma.

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