The a2 Milk Company Limited, together with its subsidiaries, commercializes a2MC brand milk and related products. a2 Milk’s insiders have invested more than 80.23 million shares in the large-cap stocks within the past three months. A well-known argument is that insiders investing more in their own companies’ shares sends an optimistic signal. A two-decade research published in The MIT Press (1998) showed that stocks following insider buying outperformed the market by 4.5%. However, these signals may not be enough to gain conviction on whether to invest. I’ve analysed two possible reasons driving the insiders’ decision to ramp up their investment of late.
Which Insiders Are Buying?
Over the past three months, more shares have been bought than sold by a2 Milk’s’ insiders. In total, individual insiders own over 12.54 million shares in the business, which makes up around 1.71% of total shares outstanding. . The entity that bought on the open market in the last three months was ASB Group Investments Ltd. BlackRock Inc. Colonial First State Asset Management (Australia) Limited Goldman Sachs Asset Management L.P. Goldman Sachs Group Investment Banking and Securities Investments. Although this is an institutional investor, rather than a company executive or board member, the insights gained from direct access to management as a large investor would make it more well-informed than the average retail investor. In this specific instance, I would classify this investor as a company insider.
Is Future Growth Outlook As Bullish?
At first glance, analysts’ earnings expectations of 123.23% over the next three years illustrates a fantastic outlook for the business which is consistent with the signal company insiders are sending with their net buying activity. Probing further into annual growth rates, a2 Milk is expected to experience an impressive double-digit top-line growth next year, which seems to drive high expected earnings growth as well. This is potentially an outcome of successful growth initiatives in place and strong cost controls, leading to sustainable operations. Insiders’ conviction in this strong performance is signalled by their net buying activity. Or perhaps they merely see the stock undervalued by the market relative to the growth potential it will deliver.
Did Stock Price Volatility Instigate Buying?
Another factor we should consider is whether the timing of these insider transactions coincide with any significant share price movements. This means, if insiders believe shares were heavily undervalued recently, this would provide a prime opportunity to buy more irrespective of its growth outlook. Within the past three months, a2 Milk’s share price traded at a high of NZ$13.3 and a low of NZ$10.29. This suggests reasonable volatility with a change of 29.25%. This movement could potentially be significant enough to warrant insiders to accrue their shares.
a2 Milk’s insider meaningful buying activity tells us the shares are currently in favour, coherent with the sizeable growth in expected earnings, although the share price has not moved significantly to warrant reassessment of mispricing. However, while insider transactions could be a helpful signal, it is definitely not sufficient on its own to make an investment decision. there are two essential aspects you should further examine:
- Financial Health: Does a2 Milk have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Other High Quality Alternatives : Are there other high quality stocks you could be holding instead of a2 Milk? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
NB: Figures in this article are calculated using data from the last twelve months, which refer to the 12-month period ending on the last date of the month the financial statement is dated. This may not be consistent with full year annual report figures.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.