Semiconductor Manufacturing International Corporation, an investment holding company, engages in the computer-aided design, manufacture, testing, packaging, and trading of integrated circuits (IC) and other semiconductor services. Semiconductor Manufacturing International is one of China’s large-cap stocks that saw some insider buying over the past three months, with insiders investing in more than 60.35 million shares during this period. It is widely considered that insider buying stock in their own companies is potentially a bullish signal. The MIT Press (1998) published an article showing 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.
Who Are Ramping Up Their Shares?
More shares have been bought than sold by Semiconductor Manufacturing International insiders in the past three months. In total, individual insiders own over 7.56 million shares in the business, which makes up around 0.15% of total shares outstanding. . The entity that bought on the open market in the last three months was Huaxin Investment Management Co. Ltd. Tsinghua Holdings Co. Ltd.. 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?
On the surface, analysts’ earnings growth projection of 6.1% over the next three years provides a moderated outlook moving forward, however, insiders may be more optimistic than the market, with their net buying activity. Delving deeper into the line items, Semiconductor Manufacturing International is believed to experience a restrained level of top-line growth over the next year, which impacts its earnings expectation resulting in a highly negative growth rate. This illustrates that cost growth has excessively exceeded that of the top-line, leading to an unsustainable decline in earnings. Although insiders may see prosperous times ahead given the current investment period, leading to their conviction to buy. Or else they may simply deem the stock to be undervalued by the negative sentiment.
Did Stock Price Volatility Instigate Buying?
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. Within the past three months, Semiconductor Manufacturing International’s share price traded at a high of HK$11.48 and a low of HK$8.51. This indicates reasonable volatility with a change of 34.9%. This movement could potentially be significant enough to warrant insiders to accrue their shares.
Semiconductor Manufacturing International’s insider meaningful buying activity tells us the shares are currently in favour, though negative growth in expected earnings contests this assumption, whereas a fairly volatile stock price could be a driver to transact. However, while insider transactions could be a helpful signal, it is definitely not sufficient on its own to make an investment decision. I’ve compiled two key factors you should further research:
- Financial Health: Does Semiconductor Manufacturing International 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 Semiconductor Manufacturing International? 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.