One way in which investors can track management sentiment is to analyze insider trading activities. These are trades executed by senior management, the board of directors or other significant shareholders.
Many of the investment sites publish insider trading activity, however it can often be misleading. Most of the time, they include all types of insider trades. Why is this a problem?
For the most part, the majority of insider trades are tied to options and warrants. This is not a true reflection of sentiment.
What investors need to look for is insiders who have made trades on the open market. Although insiders can buy or sell a position for a wide-variety of reasons, open market trades that are not tied to options or warrants are usually a pretty good indication of sentiment.
One stock that has seen increased bullish activity is Dream Unlimited (TSX:DRM).
Uptick in trading activity
Dream is a small cap real estate firm that provides real estate asset management and advisory services in Western Canada. In recent months, two members of the management team have making huge buys on the open market.
Jason Lestor, Vice Chair of Development purchased a total of 74,125 shares in 10 separate transactions over two months (May and June). Lestor picked up shares between $7.01 and 7.27 per share. As of writing, he has made out quite well as Dream is currently trading at 8.17 per share.
Lestor’s buys, although significant in their own right pale in comparison to the buys made by President and CEO Michael Cooper. Through his wholly owned corporation, Sweet Dream Partnership, Cooper purchased approximately 1% of the company’s shares outstanding.
On May 17, Cooper purchased 537,600 shares at a price of $7.45 for a total purchase price of approximately $4 million. He wasn’t done there.
On July 19, Cooper added to 550,000 shares to his position at a price of $7.85 per share. In total, Cooper has spent approximately $8.3 million on Dream shares.
This is clearly a sign that management is confident in the long-term prospects of the company.
Over the past year, Dream has struggled losing approximately 14% of its value. At current price levels, Dream now offers excellent value. It is trading at only 8.69 times forward earnings and below book value (0.82).
The company’s earnings outlooks are a little choppy and they tend to vary year to year. However, analysts are bullish on the company and have a unanimous buy rating on Dream Unlimited with an average one-year price target of $11.30 per share. This implies 39% upside.
At current valuations, the company appears to be undervalued. Management has picked up on this and have been increasing their holdings. It is a strategy that has paid of well for Mr. Lestor and Mr. Cooper thus far.