Should You Follow This Trend For RXP Services Limited (ASX:RXP)?

RXP Services Limited provides information and communications technology consulting, development, support, and maintenance services to corporations and government bodies in the Asia-Pacific Region. RXP Services's insiders have invested more than 4 million shares in the small-cap stocks within the past three months. 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’ve analysed two possible reasons driving the insiders’ decision to ramp up their investment of late.

Check out our latest analysis for RXP Services

Which Insiders Are Buying?

Over the past three months, more shares have been bought than sold by RXP Services's' insiders. In total, individual insiders own over 12 million shares in the business, which makes up around 7.67% of total shares outstanding. Insiders that have recently bought more shares are:

Name	Management	Board	Total Annual Compensation
John Pittard		✔	$111,346
Ross Fielding	✔	✔	$533,760

The entity that bought on the open market in the last three months was Microequities Asset Management Pty 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.

Does Buying Activity Reflect Future Growth?

On the surface, analysts’ earnings growth projection of 57.47% over the next three years provides a great outlook going forward which is consistent with the signal company insiders are sending with their net buying activity. Digging deeper into the line items,RXP Services is expected to experience a strong double-digit revenue growth next year, which seems to drive higher expected earnings growth as well. This could indicate significant cost-cutting activities or a high degree of economies of scale which may have a compounding impact in the future. If insiders recognised this, a signal of their confidence may be their higher shareholdings in the company. Or they may simply view the share price is currently too low compared to the share’s intrinsic value.

Can Share Price Volatility Explain The Buy?

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, RXP Services’s share price reached a high of A$0.7 and a low of A$0.47. This suggests reasonably high share price volatility with a change of 48.94%. Insiders may deem this relatively meaningful movement as an opportunity to increase their shareholdings.

Next Steps:

RXP Services’s net buying tells us the stock is in favour with some insiders, which is consistent with the significant expected earnings growth, on top of a reasonable share price movement around the same time. Although insider buying can be a useful prompt, following the lead of an insider, however, will never replace diligent research. I've put together two essential aspects you should further examine:

1. Financial Health: Does RXP Services 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 RXP Services? 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.