Insider activity is a great tool to supplement your analysis. It allows you to gain some understanding of management’s thinking, but more important, it can confirm hunches you may already have about a certain stock.
There’s only one reason why an insider would buy their own stock, but there are ample reasons why an insider would be selling. It could be for personal financial reasons that have nothing to do with the business or its current valuation, but if several insiders are offloading their stock at around the same time, that could be a sign that a stock’s getting a bit ahead of itself or that there could be a rough ride on the horizon.
Consider Dollarama Inc. (TSX:DOL), a fantastic Canadian retailer that has outperformed almost every brick-and-mortar retailer on the TSX. Management has done an impeccable job of expanding and catering to consumer demand, and with potential growth in Latin America, there are many reasons for investors to be bullish about growth going forward.
The growth ceiling is quite high, the company’s management team is incredibly strong, and the industry is essentially Amazon.com, Inc.-proof. That should imply a premium multiple, but 38.63 times trailing earnings is far too steep for my liking. It’s apparently also too rich for many insiders, including Mr. Robillard and Mr. Thomas, both of whom did a remarkable amount of profit taking last month.
At this point, I think it’d be a very wise move to follow these insiders by doing some position trimming of your own if you’re a shareholder. It never hurts to take a little bit of profit off the table, and now that shares are clearly in overvalued territory, it’s as good a time as any to ring the register and possibly buy yourself a couple nice things from Canada’s favourite dollar store.
In addition to the ridiculously high multiple and the recent insider selling, I’m not a fan of Dollarama’s recent share repurchases, which I believe could be destroying shareholder value as the buybacks are coming at what I believe are ridiculously expensive multiples.
Bottom line
Sure, Dollarama is a wonderful growth business that’s also defensive in nature, but if you’ve made a great deal, why wouldn’t you at least trim some profits? It’s important to not to get too attached to an overheated stock; otherwise, you could end up getting burned. As fellow Fool contributor David Jagielski pointed out, minimum wage hikes could be enough of a headwind to cause unrealistic investors to throw in the towel on Dollarama, a stock that I believe has nothing but perfection baked in.
Stay hungry. Stay Foolish.
