Absolute Software Corporation develops, markets, and supports endpoint management and data security solutions for endpoint computing devices in Canada, the United States, and internationally. Absolute Software is one of Canada’s small-cap stocks that saw some insider selling over the past three months, with insiders divesting from 6.55k shares during this period. It is widely considered that insider selling stock in their own companies is potentially a bearish signal. The MIT Press (1998) published an article showing that stocks following insider selling underperformed the market by 2.7%. However, these signals may not be enough to gain conviction on whether to divest. Today we will evaluate whether these decisions are bolstered by analysts’ expectations of future growth as well as recent share price movements.
Who Are Selling Their Shares?
Over the past three months, more shares have been sold than bought by Absolute Software’s insiders. In total, individual insiders own less than one million shares in the business, or around 2.41% of total shares outstanding.
The following insiders have recently reduced their company holdings: Amanda Mallow (management) and Mark Gracey (management) .
Is This Consistent With Future Growth?
On the surface, analysts’ earnings growth projection of 375% over the next three years provides a fantastic outlook for the business. However, this is inconsistent with the signal company insiders are sending with their net selling activity.
Delving deeper into the line items, analysts anticipate a limited level of revenue growth next year, but a significantly higher expected earnings growth. This could indicate large cost-cutting initiatives by the company to boost its earnings.
This may not be seen as a maintainable practice by insiders, who may expect a deterioration in earnings to reflect lower revenues growth in the future. Or they may merely view the stock as overvalued by the market which provides a suitable time to sell.
Did Stock Price Volatility Instigate Selling?
Alternatively, the timing of these insider transactions may have been driven by share price volatility. This means, if insiders believe shares were heavily undervalued recently, this would provide a prime opportunity to buy more irrespective of its growth outlook.
Absolute Software’s shares ranged between CA$7.91 and CA$6.75 over the past three months. This suggests moderate volatility with a share price movement of 17.19%.
Perhaps not a significant enough movement to warrant transactions, thus motivation may be a result of their belief in the company in the future or simply personal needs.
Absolute Software’s net selling activity tells us the stock has fallen out of favour with some insiders as of late, though the positive growth in expected earnings tells us a different story, and the share price has not moved significantly to warrant reassessment of mispricing. However, it’s important to keep in mind, insider selling may not necessarily be based on their belief of the company’s ability to perform in the future. Furthermore, while insider transactions could be a helpful signal, it is definitely not sufficient on its own to make an investment decision. I’ve put together two key factors you should further examine:
- Financial Health: Does Absolute Software 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 Absolute Software? 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.