Should You Buy China Display Optoelectronics Technology Holdings Limited (HKG:334) When Insiders Do?

China Display Optoelectronics Technology Holdings Limited, an investment holding company, engages in the research, development, manufacture, distribution, and sale of liquid crystal display modules for mobile phones and tablets in Hong Kong, China, South Korea, and Taiwan. China Display Optoelectronics Technology Holdings’s insiders have invested more than 3.37 million 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 research published in The MIT Press (1998) concluded 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.

Check out our latest analysis for China Display Optoelectronics Technology Holdings

Which Insiders Are Buying?

SEHK:334 Insider Trading July 29th 18
SEHK:334 Insider Trading July 29th 18
Over the past three months, more shares have been bought than sold by China Display Optoelectronics Technology Holdings’s’ insiders. In total, individual insiders own over 177.4 million shares in the business, which makes up around 8.5% of total shares outstanding. The entity that bought on the open market in the last three months was TCL Corporation. 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?

SEHK:334 Future Profit July 29th 18
SEHK:334 Future Profit July 29th 18
On the surface, analysts’ earnings growth projection of 31.45% 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. Delving deeper into the line items, China Display Optoelectronics Technology Holdings 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 means cost growth is anticipated to outstrip revenues, indicating a period of investment and growth in the company. This seems to be supported by insiders’ conviction illustrated by their net buying activities. Or else they may simply deem the company as undervalued by the market based on future growth it could produce.

Can Share Price Volatility Explain The Buy?

An alternative reason for recent trades could be insiders taking advantage of the share price volatility. A correlation could mean directors are trading on market inefficiencies based on their belief of the company’s intrinsic value. Within the past three months, China Display Optoelectronics Technology Holdings’s share price traded at a high of HK$0.83 and a low of HK$0.59. This suggests a relatively high volatility with large change of 40.68%. This movement is meaningful enough to trade on if insiders believe the market has mispriced their companies’ shares.

Next Steps:

China Display Optoelectronics Technology Holdings’s insider meaningful buying activity tells us the shares are currently in favour, although the expected earnings growth challenges this conclusion, whilst a moderate share price movement could provide incentive to buy now. However, while insider transactions could be a helpful signal, it is definitely not sufficient on its own to make an investment decision. there are two important aspects you should further research:

  1. Financial Health: Does China Display Optoelectronics Technology Holdings 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 China Display Optoelectronics Technology Holdings? 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.