Should You Buy Heron Resources Limited (ASX:HRR) When Insiders Do?

Heron Resources Limited engages in the exploration and development of base and precious metal deposits in Australia. Heron Resources is one of Australia’s small-cap stocks that saw some insider buying over the past three months, with insiders investing in more than 19 million shares during this period. Generally, insiders buying more shares in their own firm sends a bullish signal. A two-decade research published in The MIT Press (1998) showed that stocks following insider buying outperformed the market by 4.5%. However, these signals may not be enough to gain conviction on whether to invest. I will be analysing whether these buying activities are supported by favourable future outlook and recent share price volatility.

View our latest analysis for Heron Resources

Who Are Ramping Up Their Shares?

Over the past three months, more shares have been bought than sold by Heron Resources's' insiders. In total, individual insiders own over 3 million shares in the business, which makes up around 1.37% of total shares outstanding. The entity that bought on the open market in the last three months was Pala Investments Limited. 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?

Analysts’ expectations for earnings over the next 3 years of 88.13% provides a very buoyant outlook for the business which is consistent with the signal company insiders are sending with their net buying activity. Probing further into annual growth rates,analysts anticipate a large double-digit top-line growth over the next year, which has not flown down into earnings expectations based on its big negative growth rate. This illustrate high cost growth relative to incoming revenues, and could indicate a time of investment and growth in the company. Insiders' net buying activities seem to bolster the idea of growth moving forward. Or they may simply view the current share price as too low relative to its intrinsic value.

Did Stock Price Volatility Instigate Buying?

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, Heron Resources’s share price reached a high of A$0.82 and a low of A$0.66. This indicates reasonable volatility with a change of 24.24%. Insiders' purchases may not be driven by this movement but perhaps their view of the company's growth in the future or simply their individual portfolio rebalancing.

Next Steps:

Heron Resources’s insider meaningful buying activity tells us the shares are currently in favour, though negative growth in expected earnings contests this assumption, and the share price movement may be too trivial to cash in on any mispricing. Although insider buying 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:

1. Financial Health: Does Heron Resources 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 Heron Resources? 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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.