Outsider buying is as good an indicator as insider buying

Santosh Nair
moneycontrol.com

What is a good indicator of whether a stock is over-valued or undervalued? Seasoned investors say insider buying or selling tells you much more than profit & loss statements or disclosures to the stock exchanges. Also, promoters or senior management staff buying shares can be seen as a sign of the stock being undervalued. But they selling shares need not always be interpreted as the stock being overvalued. Here is another fairly good indicator of whether a stock offers value: a rival company or its promoter buying stake. This sends a stronger signal to the market than when a high networth investor or a star fund manager backs it. There are two reasons for it. One, being in a similar line of business, the rival company/promoter would have a good understanding of the business, as well as market intelligence on how far the numbers can be trusted. Two, a rival will be more careful of committing money because he will be indirectly endorsing that stock, and at the same time have less information than the promoter of that company. In the recent past, promoters have bought their own shares through creeping acquisition or buyback programs, more to signal a floor price for their battered stocks. Competitors will have no such motives while buying the shares.
Last week, Dilip Shanghvi, the low-profile promoter of Sun Pharma picked up 10 lakh shares or 3.5% of Natco Pharma from the market through two bulk deals. The reason behind the purchase is not known. Natco Pharma