3 compelling growth stocks that directors are buying By Claude...

3 compelling growth stocks that directors are buying

By Claude Walker - July 5, 2014 | More on: PGCPMERFX
As the old saying goes, directors sell for many reasons, but buy for only one. Though some directors buy symbolic and small parcels of shares in order to give the impression of supporting the company, generally speaking, extensive director buying is a signal that insiders have confidence in the business. You won’t often see directors of blue-chip companies like Rio Tinto Limited (ASX: RIO) buying shares at market prices, and too few investors question why that is.

One company that has seen its boss buy on market recently is Paragon Care Ltd. (ASX: PGC), a growing supplier of surgical instruments, medical equipment and medical consumable products. In the last nine months the Managing Director, Mark Simari, has bought almost $50,000 worth of shares (though in July last year a different director sold far more – at slightly above current prices). Director Mark Newton has also been buying small parcels of shares.

The company is in the process of integrating its recent acquisition, and says that the current annualised EBITDA of the business is approximately $2.8m. If you set aside $800,000 for Interest, Depreciation and Amortisation, this suggests annualised earnings would be around $2 million, considering the company has accumulated losses, and may not have to pay much tax. At a glance, it looks quite cheap with a market cap of $18 million plus debt of around $4 million. Pleasingly for shareholders, the company has begun paying a dividend.
My main concern with Paragon is that future cashflows and dividends are hard to predict because sales are primarily driven by capital expenditure orders and therefore quite lumpy. Certainly, the indifference of the federal government to healthcare needs does not bode well, in the short term.

I think the company’s strategy to acquire other medical suppliers is sensible, because it will bring synergies and economies of scale. However, it is important that the price paid is reasonable, especially given the company has stated its intention to take on more debt to fund “a key acquisition” after undertaking due diligence. I don’t like debt funded acquisition strategies as a general rule, although the low interest rate environment should help.

http://www.********.au/2014/07/05/3-compelling-growth-stocks-that-directors-are-buying/