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Which chairman just dropped $23 million on his own company’s shares?

Director buying and selling is often followed closely by professional and mum and dad share market investors alike. This is because it gives all market participants a good guide as to what the senior management at a company potentially think about the value of its shares relative to its recent operational or financial performance.

For example recently we’ve seen the chief executive of construction giant Lendlease Group (ASX: LLC) sell around 300,000 shares on September 3 for $6 million not long before the group revealed to the market on November 9 that its engineering and services business was suffering from “further underperformance” in an update that sent its share tumbling.

Elsewhere the chief executive and chief financial officer of Ltd (ASX: KGN) sold large chunks of shares a couple of times over 2018 despite claiming that the outlook for the business was as strong as ever.

However, on October 29 2018 Kogan warned that it was being adversely affected by overseas rivals selling into Australia without GST and that gross margin was being hurt by the weaker Australian dollar. This news sent shares tumbling after the insiders had sold plenty of shares.

So while insider selling can be a clear warning sign for investors, insider buying can be a “buy signal” for other investors.

In a November 22 announcement to the market Pilbara-based iron ore miner Fortescue Metals Group Limited (ASX: FMG) revealed that its non-executive chairman, founder, and former CEO Andrew “Twiggy” Forrest has bought 1.06 million shares on market for a total value of $23.2 million.

The shares were traded “on market” on November 15 and 21 meaning this was an active investment decision, rather than as a result of options vesting for example.

Given Fortescue earned 28 US cents per share ($A0.39 cents FX adjusted) and paid total dividends of A$0.23 cents per share you can see why Forrest thinks the stock is cheap at prices under $4.

For example at $3.90 it sells for just 10x trailing earnings with a 5.9% yield. It has also made significant progress paying down debt recently, although net debt still stands at US$3.1 billion for the miner.

If iron ore prices hold or tick higher in 2019, Fortescue shares will probably offer today’s investors strong returns in 2019, but nobody knows which way iron ore prices will head especially given the backdrop of the ongoing US / China trade dispute.

Motley Fool contributor Yulia Mosaleva has no position in any of the stocks mentioned. The Motley Fool Australia has recommended ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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