As you'll no doubt already be aware, many investors like to keep a close eye on what company directors get up to in terms of buying and selling shares in the firms that they manage on a day-to-day basis. If anyone has inside knowledge of a company's future prospects then surely it's the bosses themselves. That's why directors' buying and selling activity is often closely monitored and widely publicised.
But before you go ahead and start selling all your shares in companies with recent director selling activity, be aware that things are not as clear-cut as they seem. It's very possible that a director has sold a big chunk of his or her holding simply because they are splashing out on a new yacht, or Ferrari, country mansion or divorce settlement. So as always, its best to use such triggers as the starting point for further research.
With this in mind, engineering support services company Babcock International(LSE: BAB) recently caught my attention. Company chairman Mike Turner picked up 10,000 shares in the FTSE 100 group at the end of last month, amounting to £88,750. On the very same day CEO Archie Bethel splashed out no fewer than five occasions to buy a total £114,000 worth of stock. Clearly Babcock's bosses have an optimistic view of the company's prospects.
Personally I think that management is taking advantage of the recent share price weakness. Babcock's shares have given up around 38% of their value since their 2014 peak of 1,417p, despite the firm delivering impressive revenue and earnings growth over the same three-year period.
With the group's profits and share price heading in different directions in recent years, I think Babcock is overdue a re-rating by the market. The City is forecasting continued steady earnings growth over the medium term with the P/E rating falling to just 9.6 by the end of fiscal 2019. A five-year historical average of 14.5 suggests to me that 50% upside is easily achievable over the next couple of years.
Meanwhile, a firm whose share price has been heading the other way is QinetiQ(LSE: QQ). The Farnborough-based defence technology firm has enjoyed a strong share price rally in recent years climbing to lows of 97p in 2010 to recent all-time highs of 285p. I expect shareholders won't be too unhappy about a near-threefold increase in the value of their holdings.
Full-year results for the year ended 31 March are due to be published next month, but despite increased optimism around the defence sector as a whole, analysts are anticipating little-or-no earnings growth for QinetiQ over the next couple of years. My belief is that QinetiQ has benefitted from the defence sector rally following Donald Trump's election victory, leaving the shares overvalued at 17 times forward earnings.
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Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.