Plenty of investors follow director trading activity closely. This is because research has shown that investment strategies that follow director trading can outperform the market at times. The logic goes something like this: top-tier directors, such as a company’s CEO and the CFO, are likely to have the most information on the inner workings of the company and the best insight into its prospects. So if they’re buying stock, there’s only one reason why – they’re confident about the future and they expect the stock to rise.
With that theory in mind, today I’m going to highlight some recent director dealing activity that looks very interesting to me.
Clipper Logistics (LSE: CLG) is a leading logistics company that counts high-profile companies such as John Lewis, Asos and Asda among its clients. In the last three years, revenues at Clipper have exploded higher on the back of the online shopping boom, rising from £235m to £400m and net profit has surged too, rising from £7.3 to £14.3m. As a result, CLG shares have climbed significantly from their 2014 IPO price of 100p, trading as high as 485p in early January.
Yet investors weren’t impressed with full-year results released on 30 July and the stock has taken a beating recently, plummeting from over 400p to 310p today. Despite the fact that revenue for FY2018 rose 17.6%, earnings per share climbed 13.6% and the dividend was hiked 16.7%, investors dumped the stock. Why? The group made little reference to future expectations and Chairman Steve Parkin said it was bringing “an element of caution” into its planning due to the wider forces affecting the UK retail sector. So what should investors make of these results and the share price fall?
Top-tier directors are loading up
Well, looking at recent director trading activity, I think the market may have overreacted here. I say this because on 30 July, both CEO Tony Mannix and CFO David Hodkin reached into their own pockets and bought significant amounts of stock. CEO Mannix bought 80,000 shares, costing him around £240,000 and CFO Hodkin bought 240,000 shares costing him around £720,000. There are not going to be many people who have a better insight into Clipper’s prospects than these two. And these transactions are sizeable purchases. Clearly, these top-level directors are confident about the future. Should you follow Mannix and Hodkin and buy Clipper stock while the share price is depressed?
There’s obviously no guarantee that following these director trades will lead to profits. Top level insiders often time their purchases poorly. Yet analysing the numbers, there’s a lot to like about Clipper, in my opinion.
For example, as I mentioned above, revenue has grown at an annualised rate of 19.4% over the last three years and City analysts expect further top-line growth of 13% this year and next. Similarly, after a 13.6% rise in earnings per share last year to 14.2p, analysts expect further growth of 23% this time and 13% next year. Cash flow looks healthy and return on equity is high, averaging 47% over the last three years. On the downside, debt is perhaps a little higher than ideal.
With the stock now trading on a P/E ratio of 17.6 and offering a prospective yield of 3.2%, I like the risk/reward profile here. I believe Clipper is a good way to play the e-commerce boom.
Edward Sheldon owns shares in Clipper Logistics. 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.