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Are Insiders Too Confident In Collagen Solutions plc (LON:COS)?

Mercedes Harden

Collagen Solutions plc develops, manufactures, and supplies medical grade collagen components and biomaterials for use in regenerative medicines, medical devices, and in-vitro diagnostics in Europe, the Middle East, Africa, North America, and Asia. Collagen Solutions’s insiders have invested more than 3 million shares in the small-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 research published in The MIT Press (1998) concluded that stocks following insider buying outperformed the market by 4.5%. But these signals may not be sufficient to gain confidence on whether to invest. I’ve analysed two possible reasons driving the insiders’ decision to ramp up their investment of late.

View our latest analysis for Collagen Solutions

Who Are The Insiders?

AIM:COS Insider_trading Jun 6th 18

Over the past three months, more shares have been bought than sold by Collagen Solutions’s’ insiders. In total, individual insiders own over 56 million shares in the business, which makes up around 17.19% of total shares outstanding. The insider that recently bought more shares is David Evans (board member) .

Does Buying Activity Reflect Future Growth?

AIM:COS Future Profit Jun 6th 18

At first glance, Collagen Solutions’s future looks good. Delving deeper into the line items,Collagen Solutions is expected to experience a double-digit top-line growth over the next year, which appears to flow through to an earnings growth of 17.38%. This indicates some degree of economies of scale which may have a compounding impact in the future. Insiders recognising these benefits as defensible may accumulate their shares in the company. Another reason could simply be they deem the shares under-priced given the growth potential the business could produce.

Did Insiders Buy On Share Price Volatility?

An alternative reason for recent trades could be insiders taking advantage of the share price volatility. Volatility provides an opportunity to trade on market inefficiencies when the stock is under-priced compared to the stock’s intrinsic value. Within the past three months, Collagen Solutions’s share price traded at a high of £0.05 and a low of £0.03. This indicates a substantial share price volatility with a change of 75.93%. This movement is meaningful enough to trade on if insiders believe the market has mispriced their companies’ shares.

Next Steps:

Collagen Solutions’s insider meaningful buying activity tells us the shares are currently in favour, which is coherent with the positive growth in expected earnings, along with the high stock price volatility over the same time period. Although insider buying can be a useful prompt, following the lead of an insider, however, will never replace diligent research. I’ve compiled two important aspects you should further research:

  1. Financial Health: Does Collagen Solutions 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.
  2. Other High Quality Alternatives : Are there other high quality stocks you could be holding instead of Collagen Solutions? 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 pass 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.