How Confident Are Insiders About Class Limited (ASX:CL1)?

Class Limited develops and distributes cloud-based accounting, investment reporting, and administration software for accountants, administrators, and advisers in Australia. Class's insiders have invested more than 5 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%. However, it may not be sufficient to base your investment decision merely on these signals. I’ve assessed two potential reasons behind the insiders’ latest motivation to buy more shares.

See our latest analysis for Class

Who Are Ramping Up Their Shares?

Over the past three months, more shares have been bought than sold by Class's' insiders. In total, individual insiders own over 29 million shares in the business, which makes up around 24.83% of total shares outstanding. The entity that bought on the open market in the last three months was Pinnacle Fund Services Limited Spheria Asset Management Pty 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.

Does Buying Activity Reflect Future Growth?

At first glance, analysts’ earnings expectations of 80.75% over the next three years illustrates a fantastic outlook for the business which is consistent with the signal company insiders are sending with their net buying activity. Delving deeper into the line items,Class is believed to experience a strong double-digit revenue growth next year, which seems to flow through to its expected earnings growth of 13.74%. This indicates some degree of economies of scale which may have a compounding impact in the future. If insiders recognised this, a signal of confidence may be in their net buying activity. Another reason for the timing of recent share acquisitions could be if they believe the stock is below its intrinsic value, which could be another motivation to buy now.

Did Insiders Buy On Share Price Volatility?

Alternatively, the timing of these insider transactions may have been driven by 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, Class’s share price traded at a high of A$3.15 and a low of A$2.33. This suggests a relatively high volatility with large change of 35.19%. This movement could potentially be significant enough to warrant insiders to accrue their shares.

Next Steps:

Class’s insider meaningful buying activity tells us the shares are currently in favour, which is coherent with the positive growth in expected earnings, on top of a reasonable share price movement around the same time. However, while insider transactions could be a helpful signal, it is definitely not sufficient on its own to make an investment decision. I've put together two relevant factors you should further examine:

• 1. Financial Health: Does Class 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 Class? 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.