Should you follow directors in buying these 2 stocks?

Does recent director dealings offer any insights for these two companies?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »