Advanced Drainage Systems, Inc. designs, manufactures, and markets thermoplastic corrugated pipes and related water management products in the United States and internationally. Advanced Drainage Systems is one of United States’s large-cap stocks that saw some insider selling over the past three months, with insiders divesting from more than 1.06 million shares during this period. It is widely considered that insider selling stock in their own companies is potentially a bearish signal. A two-decade research published in The MIT Press (1998) showed that stocks following insider selling declined 2.7% relative to the market. 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?
There were more Advanced Drainage Systems insiders that have sold shares than those that have bought. In total, individual insiders own over 10.53 million shares in the business, which makes up around 18.5% of total shares outstanding. Insiders that have recently sold some of their shares include Ewout Leeuwenburg (management) , Joseph Chlapaty (board member) and Ronald Vitarelli (management) .
Is This Consistent With Future Growth?
At first glance, analysts’ earnings expectations of -1.1% over the next three years illustrates negative outlook for the business, consistent with the signal company insiders are sending with their net selling activity. Digging deeper into the line items, Advanced Drainage Systems is expected to experience a limited level of revenue growth next year, but a strong double-digit earnings growth of 11.0%. This may mean the company’s cost-cutting initiative will be significant enough to boost earnings. However, insiders may recognise this is not a sustainable practice and this negative sentiment is evidenced by their net selling activity. Or they may simply view the current share price is well-above the intrinsic value, providing a prime time to sell.
Did Stock Price Volatility Instigate Selling?
Another factor we should consider is whether the timing of these insider transactions coincide with any significant share price movements. Volatility provides an opportunity to trade on market inefficiencies when the stock is under-priced compared to the stock’s intrinsic value. In the past three months, Advanced Drainage Systems’s share price reached a high of $31.75 and a low of $25.4. This indicates some volatility with a share price change of of 25%. This may not be large enough to warrant any significant divesting, therefore the underlying driver may be the insiders’ belief of company growth prospects or simply their personal portfolio diversification needs.
Advanced Drainage Systems’s insiders’ meaningful divestments tells us that their shares have recently fallen out of favour, however, this is rather cautious relative to analysts’ earnings expectation, and the share price has not moved significantly to warrant reassessment of mispricing. However it’s crucial to note that insider divesting may have nothing to do with their views on the company’s future performance. Moreover, while insider selling can be a useful prompt, following the lead of an insider, however, will never replace diligent research. I’ve compiled two relevant factors you should further examine:
- Financial Health: Does Advanced Drainage Systems 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 Advanced Drainage Systems? 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.