Date: Wednesday, 02 September 2020
It is not uncommon to see companies perform well in the years after insiders buy shares. Unfortunately, there are also plenty of examples of share prices declining precipitously after insiders have sold shares. So we'll take a look at whether insiders have been buying or selling shares in Danakali Limited (ASX:DNK).
Most investors know that it is quite permissible for company leaders, such as directors of the board, to buy and sell stock in the company. However, such insiders must disclose their trading activities, and not trade on inside information.
We would never suggest that investors should base their decisions solely on what the directors of a company have been doing. But logic dictates you should pay some attention to whether insiders are buying or selling shares. For example, a Harvard University study found that 'insider purchases earn abnormal returns of more than 6% per year'.
In the last twelve months, the biggest single purchase by an insider was when Non-Executive Chairman of the Board Seamus Cornelius bought AU$1.7m worth of shares at a price of AU$0.42 per share. That implies that an insider found the current price of AU$0.46 per share to be enticing. That means they have been optimistic about the company in the past, though they may have changed their mind. While we always like to see insider buying, it's less meaningful if the purchases were made at much lower prices, as the opportunity they saw may have passed. Happily, the Danakali insiders decided to buy shares at close to current prices. Notably Seamus Cornelius was also the biggest seller.
In the last twelve months insiders purchased 7.39m shares for AU$3.2m. But they sold 4.18m shares for AU$1.7m. In the last twelve months there was more buying than selling by Danakali insiders. You can see the insider transactions (by companies and individuals) over the last year depicted in the chart below. By clicking on the graph below, you can see the precise details of each insider transaction!
There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of growing companies that insiders are buying.
There has been significantly more insider buying, than selling, at Danakali, over the last three months. We can see that Non-Executive Chairman of the Board Seamus Cornelius paid AU$3.1m for shares in the company. But Non-Executive Chairman of the Board Seamus Cornelius sold shares worth AU$1.7m. We think insiders may be optimistic about the future, since insiders have been net buyers of shares.
Many investors like to check how much of a company is owned by insiders. A high insider ownership often makes company leadership more mindful of shareholder interests. Insiders own 24% of Danakali shares, worth about AU$34m. We've certainly seen higher levels of insider ownership elsewhere, but these holdings are enough to suggest alignment between insiders and the other shareholders.
The recent insider purchase is heartening. And an analysis of the transactions over the last year also gives us confidence. But we don't feel the same about the fact the company is making losses. Insiders likely see value in Danakali shares, given these transactions (along with notable insider ownership of the company). So these insider transactions can help us build a thesis about the stock, but it's also worthwhile knowing the risks facing this company. Be aware that Danakali is showing 2 warning signs in our investment analysis, and 1 of those is concerning...
If you would prefer to check out another company -- one with potentially superior financials -- then do not miss this free list of interesting companies, that have HIGH return on equity and low debt.
For the purposes of this article, insiders are those individuals who report their transactions to the relevant regulatory body. We currently account for open market transactions and private dispositions, but not derivative transactions.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.