Shares in automotive parts and accessories supplier Bapcor Ltd (ASX: BAP) and business travel services provider Corporate Travel Management Ltd (ASX: CTD) are falling following recent sell-offs by their respective Managing Directors.
On 1 December, Bapcor announced CEO and Managing Director Mr. Darryl Abotomey sold 600,000 shares at a price of $5.90. Bapcor shares had been trading as high as $5.95 that day before closing at $5.72, a fall of almost 4%.
Mr. Abotomey still owns more than 1.5 million Bapcor shares through direct or indirect interests, as well as significant performance rights. Bapcor stated its Managing Director had sold for personal asset management reasons, and that he has no intention to sell any further shares at this stage.
On 3 November, Corporate Travel Management announced its Managing Director, Mr. Jamie Pherous, had sold 1.165 million shares at $23.00 per share. Mr. Pherous will use the proceeds for a personal investment and still owns 20.485 million company shares.
There haven't been any other company announcements since then, but the Corporate Travel share price has tanked from $24.04 at the end of October to its current price of $19.70, an 18% fall.
While it's never pleasant to see an insider selling off a significant share of a company within your portfolio, there are an infinite number of reasons why someone would reduce their holdings.
In both the above cases, the managing directors have retained a significant interest, so I wouldn't take it as a sign to automatically sell if you're holding either of these two stocks.
What's more important is to keep track of how the company is performing, and it doesn't seem to me that the story behind either Bapcor or Corporate Travel Management has changed very much of late. Having said that, these two companies may continue their downward share price momentum in the short-term.
For me, it's a much stronger indicator of a company's prospects when you find insiders buying up stock. One recent example of insider buying activity is with listed investment company MFF Capital Investments Ltd (ASX: MFF). A stock I've been keeping an eye on as I hold it within my own portfolio.
MFF Managing Director and Portfolio Manager Mr. Chris MacKay has steadily been adding to his significant holdings; purchasing approximately 3.5 million shares between early August and late October this year. During that time, MFF's share price has been as low as $1.875 in September, before rising to its current level of $2.25.
When insiders like Mr. Mackay, who have much greater knowledge of their company than any investment analyst, are buying up stock, it's as good a sign as any that the shares may be undervalued.
Foolish takeaway
Don't panic just because an insider has sold some shares, they could have done so for any reason. Take it as signal to re-check the company's story and find out if anything has materially changed.
One of the few scenarios under which I would have immediate concerns surrounding a sell-off is when company founders dispose of their holdings following an initial public offering (IPO).
I believe insider buying is a much stronger indicator of how the company is performing relative to market expectations and a sign that shares are undervalued. There are an infinite number of reasons why an individual would sell a share, but only one reason to buy.
When checking insider holding changes on a company's Appendix 3Y disclosure, look to see if a purchase has been conducted "on-market" rather than automatically through a dividend reinvestment plan or the issue of performance rights.
