As outside investors in UK shares, we never quite know the full story about what’s going on inside the companies we own. That’s why I think director buying can be such a valuable sign. If an insider wants to spend their own cash on the stock, they must feel good about the future.
What I’m looking for is the real deal — one or two directors spending at least £100,000 buying their own shares. I reckon I’ve found just such a company today. The business in question is a small-cap stock whose executive chairman has just spent £825,000 on shares.
This UK share has doubled in two years
The company concerned is Volex (LSE: VLX), a £250m British firm that’s been in business for more than 100 years. Volex makes power cords and cabling assemblies for a range of markets. These include consumer electronics, data centres, medical equipment, factories and — more recently — electric vehicles.
The Volex share price has doubled over the last two years and has been a strong performer during the market crash. The stock is up by nearly 20% so far in 2020, compared to a 20% fall for the FTSE 100.
Despite this recent growth, I think there’s more to come from this UK share. Volex’s growing focus on higher-value products such as electric vehicle wiring suggests to me that sales and profit margins could rise significantly.
I own Volex shares and intend to continue holding. Executive chairman Nat Rothschild appears to agree. He spent £825k on the stock on Tuesday, taking his total stake in the firm to 24.9%.
Given the size of his existing holding, Mr Rothschild didn’t need to buy more shares to prove his commitment. In my view, his decision to buy more stock suggests to me that he’s very confident about the outlook for this business.
Trading well despite COVID-19
The coronavirus pandemic has disrupted many manufacturers around the world this year. Volex appears to have escaped fairly lightly so far. The group’s results for the year to 5 April showed revenue up by 5.2% to $391.4m, with pre-tax profit up 37% at $15.9m.
Cash generation remained strong too — the company ended the year with net cash of $21.2m, slightly more than one year ago.
Trading since April has been affected by coronavirus, but the impact doesn’t seem too bad. Revenue for April-June 2020 was $96m, which was unchanged from the same period last year. This suggests to me that the pandemic may have slowed Volex’s growth, but hasn’t caused a sudden collapse in demand.
The right time to buy?
I’m a firm believer in buying UK shares for the long term and not focusing too much on short-term market conditions. But the stock market crash has created some attractive buying opportunities, of which I think Volex is one.
Brokers expect the firm’s profits to take a hit this year before bouncing back strongly in 2021/22. The shares trade on 21 times current year forecast earnings, but this multiple falls to just 10.5 times earnings for 2021/22.
If Mr Rothschild can continue to deliver a good mix of organic growth and acquisitions, I think the Volex share price is likely to continue rising. I view the stock as a good buy at current levels.
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Roland Head owns shares of Volex. 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.