Insiders Are Selling CGI Group: Should You?

Insiders may be selling their shares in this company, but that may not be wise. Here’s a look at whether CGI Group is still good to own.

| More on:
The Motley Fool

Successful investing requires analyzing financial reports, evaluating a company’s growth prospects, and assessing whether a company has the right management team. A shortcut, used by some traders, is to rely on insider activity to guide investing decisions. Insiders, which includes senior officers and directors, need to disclose their purchases and sales of company stock.

According to INK Research, CGI Group (TSX: GIB.A)(NYSE: GIB) had the third-highest dollar volume of insider selling on the Toronto Stock Exchange over the past 60 days — nearly $60 million of stock. With a presence in the Americas, Europe, and Asia-Pacific, CGI provides end-to-end IT consulting, outsourcing, and systems integration services to customers within specific sectors, including government, healthcare, financial services, and telecommunications.

For bottom-up, long-term investors, insider activity is just one piece of information to consider. Like every investor, insiders have their own reasons for buying and selling, and their actions may not be a clear signal on where the stock price is headed.

Apart from insider activity, let’s take a closer look at the case for, and against, an investment in CGI Group.

The case for CGI Group

CGI had a solid second quarter that saw profit more than double, driven by a 7% rise in revenue and strong European orders.

The company booked $2.9 billion in new business during the quarter, and reported a book-to-bill ratio of 105%. Book-to-bill is the ratio of orders added to the company’s backlog versus completed work that’s been billed to clients. A ratio over 100% means CGI is winning work faster than it’s completing existing orders, and increasing backlog. CGI’s acquisition of U.K.-based competitor Logica in 2012 for £1.7 billion appears to be paying off — the company recorded a book-to-bill ratio of 110% in Europe compared to just 98% in North America.

Despite the strong quarter, CGI has lost 6% of its value over the past six months compared to a 9% gain in the S&P/TSX Composite Index (TSX: ^OSPTX). It’s currently trading 9% below its 52-week high. Today, CGI offers investors an attractive valuation. Its trailing and forward price to earnings ratios trade at a slight discount to their five-year averages. Its forward PEG, which is the forward P/E ratio divided by the five-year forecasted growth rate, is just 0.6 — significantly lower than the five-year average of 1.1.

The case against CGI Group

Reduced U.S. government spending on IT-related services and the issues surrounding the troubled roll-out of President Obama’s healthcare website are two reasons why CGI’s book-to-bill ratio for North America slipped below 100% for the most recent quarter. CGI Group’s contract to manage the online U.S. health exchange program was subsequently not renewed.

The business of IT outsourcing, systems integration, and consulting is very competitive, and pricing pressure is sure to increase as competitors try to capitalize on CGI’s recent missteps in North America.

Then there is the issue of CGI’s dual-share structure. Thanks to the company’s Class B shares, the direction of the company is tightly controlled by the company’s co-founders. Good corporate governance usually requires that equity ownership and voting rights go hand in hand — not so at CGI.

Finally, because CGI reports in Canadian dollars, its results are positively impacted by a lower Canadian dollar relative to a range of currencies it does business in. The Canadian dollar has lost nearly 10% of its value compared to the U.S. greenback over the past 18 months. Any appreciation in the value of the loonie from current levels will hurt CGI’s financial performance.

So should you invest?

CGI is among the world’s five largest computer services companies. And with a market capitalization of $11.3 billion, CGI is nearly three times larger than Canada’s best known technology brand, BlackBerry (TSX: BB)(NASDAQ: BBRY).

CGI has grown to approximately 68,000 employees, and has proven adept at identifying and acquiring companies that can be successfully integrated into its business model. And it’s delivered for investors, gaining nearly 300% over the past five years.

CGI is a Canadian success story, even if it’s not as well-known as BlackBerry. I don’t think CGI is going anywhere but up over the next five to 10 years; it offers an excellent opportunity for long-term investors to achieve market-beating returns.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Justin K Lacey has no positions in any of the stocks mentioned in this article.

More on Investing

3 colorful arrows racing straight up on a black background.
Investing

1 Must-Consider Stock as the TSX Reaches New Heights

Constellation Software (TSX:CSU) stock still looks like a great deal at around $5,000 per share.

Read more »

Canada national flag waving in wind on clear day
Investing

3 Must-Have Canadian Stocks for Your TFSA During Economic Uncertainty

These three all-weather Canadian stocks are ideal additions to your TFSA.

Read more »

stock research, analyze data
Dividend Stocks

The Smartest Dividend Knight to Buy With $800 Right Now

One of the TSX’s dividend knights is a smart buy today, even with a less than $1,000 investment.

Read more »

A close up color image of a small green plant sprouting out of a pile of Canadian dollar coins "loonies."
Investing

1 Magnificent TSX Stock Down 80% With Massive Growth Potential

Down 80% from all-time highs, this top TSX stock trades at a sizeable discount given the company's steady growth estimates.

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

How I’d Invest $40,000 of TFSA Cash in 2025

These three TFSA investments are some of the best options out there, especially while each remain on sale.

Read more »

Aircraft Mechanic checking jet engine of the airplane
Dividend Stocks

Where I’d Invest $2,800 in the TSX Today

Looking for a mix of resilience, income, and upside, I'd consider building a position in Exchange Income as a part of…

Read more »

ways to boost income
Coronavirus

Why I’m Holding My Air Canada Stock Despite Recent Turbulence

Air Canada (TSX:AC) stock is down this year, but I'm holding the line.

Read more »

A plant grows from coins.
Dividend Stocks

This Dividend Knight Paying 3.9% Is Trading at a Deep Discount 

Find out how the recent dip in goeasy stock affects its dividend and what it means for potential investors today.

Read more »