Director buys can be a sign that those with the most insight into a company view its shares as undervalued. One notable ASX 200 share with multiple recent director buys is Afterpay Ltd (ASX: APT).
What is insider buying?
Insider buying is the purchase of shares in a company by an officer or executive of that company, such as a director. Insiders usually have exclusive insights into the companies they manage and are likely to purchase shares when they view them as undervalued.
Insiders must only buy based on publicly available information and must inform the ASX of the trade by lodging an Appendix 3Y. Depending on the circumstances, the purchase by an insider of shares can be seen as a vote of confidence in a business. Buys by multiple insiders can act as a stronger signal, as can larger, rather than smaller, share purchases.
Insiders buying Afterpay shares
Three Afterpay directors have acquired an aggregate of 34,090 shares in the company over the last week. Afterpay is Australia's best known BNPL provider, with some 7.3 million active customers and more than 43,000 active merchants.
Afterpay shares have been on a rollercoaster during the current market maelstrom. Starting from a high of $40.50 in February, shares plunged to a low of $8.90 on Monday, but have since recovered somewhat and are currently trading at $16.98.
Investors fled the company on recession fears, with lower consumer spending likely to impact the volume of transactions processed using Afterpay. The company issued a letter to shareholders last week saying it had not seen any material impact on its business activity, the timing of instalment repayments, or transaction losses to date.
Afterpay noted that there is no material concentration in the portfolio from a merchant or customer perspective. With a business model based on high-frequency purchasing and repayment rates, average transaction values are low (around $150) as are average outstanding balances (around $211).
CEO Anthony Eisen said Afterpay's service "promotes budgeting by responsible customers," emphasising that the service is unable to be accessed by customers that have a single overdue repayment.
"We believe the appeal of Afterpay as a disciplined budgeting tool will not be diminished and may be enhanced with changing market conditions," Eisen told shareholders.
Foolish takeaway
Afterpay shares have been punished in the recent market downturn, based on fears over the spread of coronavirus and its economic impacts. The selldown, however, may have been overdone – director buys can provide a good indication that those best placed to know consider shares good value.
