Company directors have more information on their businesses than the rest of us do. Therefore, their trades are worth keeping an eye on. Recently, I spotted a substantial director purchase at FTSE 250 digital transformation company Kainos (LSE: KNOS). Here’s a look at the trade in more detail.
£100k director purchase
Regulatory filings show that on 20 December, Kainos director Katie Davis snapped up 6,400 KNOS shares at a price of £15.64 per share. This trade cost her just over £100k.
I think this trade is quite interesting for several reasons. Firstly, Davis – who has served on the Kainos board for over three years – has a background in digital transformation. Previously, she served at the Cabinet Office where she was responsible for delivering large-scale IT-enabled change. Given her background, she is likely to have a good understanding of the company’s prospects.
Secondly, she has invested a substantial sum in Kainos shares. While this director purchase is not huge by global terms, it is relatively large by UK standards. In my view, the fact that she has invested £100k of her own money in the company suggests that she is pretty confident about Kainos’ growth prospects and that she expects the share price to rise.
My thoughts on the stock
Now I already own some Kainos shares. But after this trade, I’m tempted to buy more. Recent results showed the company has a lot of momentum right now.
For the six months to 30 September, revenue was up 26% year on year to £180m while adjusted diluted earnings were up 15% year on year to 22p. At the end of September, the company’s contracted backlog was £308m, up 23% year on year.
And management was very optimistic about the future. “Looking forward, we remain confident in our business as the demand for our services has never been higher,” said CEO Brendan Mooney. “The journey is just starting,” he added.
It’s not just the growth that impresses me here though. This is a company with a blue-chip customer base. Its customers include Netflix, Booking.com, the Home Office, the Cabinet Office, and the NHS.
It’s also a company with strong financials. Return on capital is high (meaning it’s very profitable), the balance sheet is strong, and the company has a good dividend growth track record.
Overall, there’s a lot to like about Kainos from an investment perspective.
On the downside, the stock’s valuation is quite high. Currently, the price-to-earnings (P/E) ratio is in the mid 30s. This doesn’t leave a margin for error. If future growth is weaker than expected, I’d expect the share price to fall.
I’m comfortable with the valuation though, given the company’s high-quality attributes. I’ll be keeping a close eye on the stock with a view to buying more shares for my portfolio soon.
Edward Sheldon has positions in Kainos Group Plc. The Motley Fool UK has recommended Kainos Group Plc. 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.
Motley Fool UK 2022