K-Bro Linen Inc., together with its subsidiaries, engages in the processing, management, and distribution of general linen and operating room linen to healthcare institutions, hotels, and other commercial accounts in Canada. K-Bro Linen is one of Canada’s small-cap stocks that saw some insider selling over the past three months, with insiders divesting from 45.00k shares during this period. A well-known argument is that insiders divesting from their own companies’ shares sends a pessimistic signal. The MIT Press (1998) published an article showing that stocks following insider selling underperformed the market by 2.7%. But these signals may not be sufficient to gain confidence on whether to divest. I’ve analysed two possible reasons driving the insiders’ decision to reduce their investment of late.
Which Insiders Are Selling?
Over the past three months, more shares have been sold than bought by K-Bro Linen’s insiders. In total, individual insiders own less than one million shares in the business, or around 3.04% of total shares outstanding.
Insiders that have recently sold some of their shares include Linda McCurdy (management and board member) and Sean Curtis (management) .
Does Selling Activity Reflect Future Growth?
Analysts’ expectations for earnings over the next 3 years of 216% provides a very optimistic outlook for the business. However, this is inconsistent with the signal company insiders are sending with their net selling activity.
Digging deeper into the line items, analysts anticipate a strong double-digit revenue growth next year, which appears to flow through to larger earnings growth expectations. This may mean the company is reaping meaningful benefits from past growth initiatives, placing it in a beneficial position for future profits.
Yet insiders’ selling action seem to contradict this optimistic earnings outlook which means they may perceive things differently to the market. They may deem the high growth is not sustainable or positive sentiment has been overly factored into the stock price.
Can Share Price Volatility Explain The Sell?
Another factor we should consider is whether the timing of these insider transactions coincide with any significant share price movements. A correlation could mean directors are trading on market inefficiencies based on their belief of the company’s intrinsic value.
In the past three months, K-Bro Linen’s share price reached a high of CA$39.97 and a low of CA$35.11. This indicates a trivial share price movement, with a change of 13.84%.
This may mean insiders’ motivation to trade may not be driven by the share price but rather other factors such as their belief in company growth or their personal portfolio diversification needs.
K-Bro Linen’s net selling activity tells us the stock has fallen out of favour with some insiders as of late, although the positive expected earnings growth challenges this assumption, and the share price movement may be too trivial to cash in on any 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. there are two relevant factors you should further research:
- Financial Health: Does K-Bro Linen 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 K-Bro Linen? 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 email@example.com.