UMS Holdings Limited, an investment holding company, provides high precision front-end semiconductor components, and electromechanical assembly and final testing services. UMS Holdings is one of Singapore’s small-cap stocks that saw some insider buying over the past three months, with insiders investing in more than 1.25 million shares during this period. A well-known argument is that insiders investing more in their own companies’ shares sends an optimistic signal. A research published in The MIT Press (1998) concluded that stocks following insider buying outperformed the market by 4.5%. However, it may not be sufficient to base your investment decision merely on these signals. I’ve analysed two possible reasons driving the insiders’ decision to ramp up their investment of late.

View our latest analysis for UMS Holdings

Who Are Ramping Up Their Shares?

There were more UMS Holdings insiders that have bought shares than those that have sold. In total, individual insiders own over 118.47 million shares in the business, which makes up around 22.09% of total shares outstanding. The insider that recently bought more shares is Andy Luong (management and board member) .

Is This Consistent With Future Growth?

Analysts’ expectations for earnings over the next 3 years of -13.6% provides negative outlook for the business, however, this is contrary to the signal company insiders are sending with their net buying activity. Probing further into annual growth rates, analysts anticipate decline in top-line growth next year, which could imply some headwinds going forward. This will likely flow through to its earnings next year with a growth of -14.3%, implying cost management may not be efficient enough to bring the company into a positive growth zone. Although, insiders seem to know something the market does not and have been ramping up their holdings in times of uncertainty. This indicates they may see a turnaround or deem the stock to be over-penalized by negative market sentiment.

Did Stock Price Volatility Instigate Buying?

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. UMS Holdings’s shares ranged between SGD0.92 and SGD0.74 over the past three months. This indicates reasonable volatility with a change of 22.82%. Insiders may deem this relatively meaningful movement as an opportunity to increase their shareholdings.

Next Steps:

UMS Holdings’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 essential aspects you should further examine: