Diversified Restaurant Holdings, Inc., a restaurant company, operates Buffalo Wild Wings franchised restaurants in the United States. Diversified Restaurant Holdings’s insiders have divested from more than 1.27 million shares in the small-cap stock within the past three months. Generally, insiders selling shares in their own firm sends 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, it may not be sufficient to base your investment decision merely on these signals. Today we will evaluate whether these decisions are bolstered by analysts’ expectations of future growth as well as recent share price movements.
Who Are The Insiders?
There were more Diversified Restaurant Holdings insiders that have sold shares than those that have bought. In total, individual insiders own over 12.96 million shares in the business, which makes up around 39.79% of total shares outstanding.
Latest selling activities involved the following insiders: David Kanen and Thomas Ansley (management and board member) . The entity that sold on the open market in the last three months was Kanen Wealth Management Llc. 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 This Consistent With Future Growth?
To the outsider, there are dark clouds on the horizon for Diversified Restaurant Holdings.
Delving deeper into the line items, analysts anticipate negative growth in its top-line over the next year, which indicates the company may be facing some headwinds. Although, expected high double-digit earnings growth could indicate the company’s cost controls will show meaningful results, offsetting the fall in revenue growth.
Net selling activities suggest that insiders may believe the high earnings growth is hard to maintain, and have divested based on a longer term prospect. Otherwise, they may view any future growth has been overly factored into current share prices, offering a favourable time to sell.
Did Insiders Sell On Share Price Volatility?
An alternative reason for recent trades could be insiders taking advantage of the 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.
In the past three months, Diversified Restaurant Holdings’s share price reached a high of $1.35 and a low of $0.87. This suggests reasonably high share price volatility with a change of 55.24%.
This movement is potentially meaningful enough to trade on if insiders believe the market has mispriced their companies’ shares. Or perhaps their reason to sell is not driven by price or growth prospects and merely by the need to diversify their own portfolio holdings.
Diversified Restaurant Holdings’s insiders’ meaningful divestments tells us that their shares have recently fallen out of favour, although the positive expected earnings growth challenges this assumption, whereas a highly volatile share price could be the driver to sell. 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 put together two relevant aspects you should look at:
- Financial Health: Does Diversified Restaurant Holdings 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 Diversified Restaurant Holdings? 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.