Should You Buy Pareto Bank ASA (OB:PARB) When Insiders Do?

Pareto Bank ASA provides various financial products and services in Norway. Pareto Bank’s insiders have invested 200,000 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, 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.

See our latest analysis for Pareto Bank

Which Insiders Are Buying?

OB:PARB Insider_trading May 9th 18
OB:PARB Insider_trading May 9th 18
More shares have been bought than sold by Pareto Bank insiders in the past three months. In total, individual insiders own over 5 million shares in the business, which makes up around 8.34% of total shares outstanding. The entity that bought on the open market in the last three months was Pareto Pensions AS. 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 Future Growth Outlook As Bullish?

OB:PARB Future Profit May 9th 18
OB:PARB Future Profit May 9th 18

At first glance, analysts’ earnings expectations of 6.04% over the next three years illustrates a restrained outlook moving forward, however, insiders may be more optimistic than the market, with their net buying activity. Digging deeper into the line items,Pareto Bank is believed to experience a restrained level of top-line growth over the next year, which impacts its earnings expectation resulting in a negative growth rate of -4.67%. This indicates cost growth has outstripped revenue which is unsustainable. However, insiders may view this as the time of investment and growth given their bullish increase in holdings. Or else they may simply believe the stock is below its intrinsic value, giving them motivation to buy now.

Can Share Price Volatility Explain The Buy?

Alternatively, the timing of these insider transactions may have been driven by share price volatility. 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, Pareto Bank’s share price reached a high of NOK40 and a low of NOK36.6. This indicates a relatively insignificant share price movement, with a small change of 9.29%. Potentially, insider transactions are not share price related but may be due to their belief on what will happen to the company in the future or simply just personal portfolio rebalancing.

Next Steps:

Pareto Bank’s net buying tells us the stock is in favour with some insiders, though negative growth in expected earnings contests this assumption, and the relatively stable stock price may not warrant exploiting any mispricing. 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 key factors you should further examine:

  1. Financial Health: Does Pareto Bank 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 Pareto Bank? 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.