Should You Follow This Trend For Encana Corporation (TSE:ECA)?

Encana Corporation, together with its subsidiaries, engages in the exploration, development, production, and marketing of natural gas, oil, and natural gas liquids in Canada and the United States. Encana's insiders have invested 23,500 shares in the large-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, it may not be sufficient to base your investment decision merely on these signals. I’ve analysed two possible reasons driving the insiders’ decision to ramp up their investment of late.

See our latest analysis for Encana

Who Are Ramping Up Their Shares?

More shares have been bought than sold by Encana insiders in the past three months. In total, individual insiders own less than one million shares in the business, or around 0.09% of total shares outstanding. Insiders that have recently bought more shares are:

Name	Management	Board	Total Annual Compensation
Douglas Suttles		✔	$108,316
Howard Mayson		✔	$96,991
Margaret McKenzie		✔	$104,541
Suzanne Nimocks	✔	✔	$13,272,252

Does Buying Activity Reflect Future Growth?

At first glance, analysts’ earnings expectations of 85.14% over the next three years illustrates an exceptional 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,Encana is believed to experience a strong double-digit revenue growth next year, which has not been passed down to earnings expectations given its large negative growth expectations. This illustrates high cost growth relative to incoming revenues, and could portray times of high investment and growth in the company. Insiders' net buying activities seem to support 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?

Another factor we should consider is whether the timing of these insider transactions coincide with any significant share price movements. This means, if insiders believe shares were heavily undervalued recently, this would provide a prime opportunity to buy more irrespective of its growth outlook. Encana’s shares ranged between CA$17.6 and CA$12.83 over the past three months. This indicates a fairly large volatility with a share price movement of 37.18%. Insiders may deem this relatively meaningful movement as an opportunity to increase their shareholdings.

Next Steps:

Encana’s net buying tells us the stock is in favour with some insiders, however, earnings expectations tell a different story, while a relatively volatile share price could be the motivation to trade. 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 important aspects you should further research:

1. Financial Health: Does Encana 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 Encana? 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.