Why Are Insiders Pessimistic About RXP Services Limited's (ASX:RXP) Stock?

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 is one of Australia’s small-cap stocks that saw some insider selling over the past three months, with insiders divesting from more than 2.66 million shares during this period. Generally, insiders selling shares in their own firm sends a bearish signal. A two-decade research published in The MIT Press (1998) showed that stocks following insider selling declined 2.7% relative to the market. However, these signals may not be enough to gain conviction on whether to divest. I’ve assessed two potential reasons behind the insiders’ latest motivation to sell their shares.

View our latest analysis for RXP Services

Who Are The Insiders?

More shares have been sold than bought by RXP Services's insiders in the past three months. In total, individual insiders own over 12.36 million shares in the business, which makes up around 7.67% of total shares outstanding. The entity that sold on the open market in the last three months was Regal Funds 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 Selling Activity Reflect Future Growth?

At first glance, analysts’ earnings expectations of 33.82% over the next three years illustrates an optimistic outlook going forward. But this is not consistent with the signal company insiders are sending with their net selling activity. Probing further into annual growth rates, RXP Services is believed to experience a restrained level of top-line growth over the next year, however, earnings growth is expected to be strong at 10.95%. This may be due to effective cost reduction initiatives implemented by the company to drive higher earnings. This may not be seen as a maintainable practice by insiders, who may expect a decline in earnings to reflect lower revenues in the future. Or they may merely view the stock as overvalued by the market which provides a suitable time to sell.

Did Stock Price Volatility Instigate Selling?

Another factor we should consider is whether the timing of these insider transactions coincide with any significant share price movements. Volatility provides an opportunity to trade on market inefficiencies when the stock is under-priced compared to the stock’s intrinsic value. In the past three months, RXP Services’s share price reached a high of A$0.60 and a low of A$0.48. This suggests some volatility with a share price change of of 25%. Perhaps not a significant enough movement to warrant transactions, thus motivation may be a result of their belief in the company in the future or simply personal needs.

Next Steps:

RXP Services’s insiders' meaningful divestments tells us that their shares have recently fallen out of favour, though the positive growth in expected earnings tells us a different story, and the relatively stable stock price may not warrant exploiting any mispricing. However it’s crucial to note that insider divesting may have nothing to do with their views on the company’s future performance. Moreover, while insider selling can be a useful prompt, following the lead of an insider, however, will never replace diligent research. I've compiled two key aspects you should look at:

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.

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 editorial-team@simplywallst.com.

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.