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China Molybdenum Co., Ltd., together with its subsidiaries, engages in the mining, smelting, processing, and scientific research of copper, molybdenum, tungsten, cobalt, niobium, phosphate, and other base and precious metals. China Molybdenum is one of China’s large-cap stocks that saw some insider selling over the past three months, with insiders divesting from more than 41.73 million shares during this period. A well-known argument is that insiders divesting from their own companies’ shares sends a pessimistic signal. A two-decade research published in The MIT Press (1998) showed that stocks following insider selling declined 2.7% relative to the market. But these signals may not be sufficient to gain confidence on whether to divest. Today we will evaluate whether these decisions are bolstered by analysts’ expectations of future growth as well as recent share price movements.
Check out our latest analysis for China Molybdenum
Who Are The Insiders?
Over the past three months, more shares have been sold than bought by China Molybdenum’s insiders. In total, individual insiders own over 5.83 million shares in the business, which makes up around 0.027% of total shares outstanding. . The entity that sold on the open market in the last three months was Capital Research and Management Company Morgan Stanley Investment Banking and Brokerage Investments. 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?
Analysts’ expectations for earnings over the next 3 years of 10.1% provides a satisfactory outlook for the company. However this is inconsistent with the signal company insiders are sending with their net selling activity. Delving deeper into the line items, China Molybdenum is expected to experience a rather subdued top-line growth over the next year, however, earnings growth is expected to be strong at 16.0%. This may mean the company’s cost-cutting initiative will be significant enough to boost earnings. However, this exercise may not be viable over the long run which may prompt insiders to reconsider their shareholdings. Or else they may view the market has overvalued the stock, presenting a favourable environment to sell.
Did Stock Price Volatility Instigate Selling?
Another factor we should consider is whether the timing of these insider transactions coincide with any significant share price movements. Volatility provides an opportunity to trade on market inefficiencies when the stock is under-priced compared to the stock’s intrinsic value. China Molybdenum’s shares ranged between HK$5.12 and HK$3.21 over the past three months. This indicates a fairly large volatility with a share price movement of 59.5%. This movement is potentially meaningful enough to trade on if insiders believe the market has mispriced their companies’ shares. Or perhaps their reason to sell is not driven by price or growth prospects and merely by the need to diversify their own portfolio holdings.