How to Find Smallcap Stocks with the Help of Insider Activity

I have been tracking insider activity in stocks for more than a year. I've noticed that amid the high valuations of the market, insider buying has fallen while insider selling has risen.

Now when low hanging fruits are rare, tracking insider buying is a good starting point to find value in this market.

When the promoters or key management of a company use personal money to increase their stakes in the company, buying at the market price, I pay attention.

As the insiders know the best about the industry's prospects and the business they're operating, it is quite possible there is something positive that the broader market has not identified yet.

Now, coming back to my observation.

GNA Axles, Kross Ltd, Talbros Engineering, and Emmforce Autotech (SME).

These stocks have witnessed insider buying in recent days. The promoters have purchased shares from the open market.

Company	Insider Entity	No of Shares Bought from Open Market	Value Purchased (Rs m)	Range of Buying Price (Rs per share) in Last One Month
Kross Ltd	Promoter	75,000	15	196-220
GNA Axle	Promoter	34,586	14	391-404
Emmforce Autotech (SME)	Promoter	1,14,000	12	105-515
Talbros Engineering	Promoter	5,711	3	548-632

Source: Market data, Equitymaster

There is an interesting pattern in this data.

You see, all these companies are operating in similar segments - manufacturing forged and machined automotive transmission components such as spindles, drive shafts, and axles. The end industries are similar - medium, heavy commercial vehicles, tractors, and farm equipment.

GNA Axles makes components like rear axles, shafts, spindles and other auto components for sale in India and export markets. The company is diversifying beyond medium and heavy vehicles to SUV and light commercial vehicle axle shaft segments.

Kross Ltd makes trailer axles, suspensions, and a different kinds of forged and precision machined safety critical parts for medium and heavy-duty commercial vehicles (M&HCV), SUVs and farm equipment.

Emmforce Autotech makes automotive drivetrain parts like spindles, axles and shafts, gear shifters, locking hobs and other forged / cast parts primarily for four wheeler drive and performance racing vehicles with a focus on export markets.

Talbros Engineering is into manufacturing and selling of rear axle shafts. It derives major share of its revenue from utility vehicles (55%), followed by commercial vehicle (23%), and 4% revenue from tractors, in the domestic market. It also has presence in export replacement market with 14% share in revenue.

While the first half of the financial year has been a bit muted for the end industry due to elections, better momentum is expected in the second half.

Kross's management, for instance, has guided for a double-digit growth. It is witnessing sharp growth in export markets (eight times growth on a very low base).

Here's a brief snapshot of the financials.

Financial Snapshot

Company	Stock Price (Rs)*	Marketcap (Rs bn)	Revenue (Rs bn)	EBIDA (Operating Profit Margin (%))	Net Profit Margn (%)	Debt to Equity	Return on Capital Empoyed (%)	Trailing 12 month PE
Kross Ltd ^	242	16	6.2	13.2	7.2	NA	33.6	34.8
GNA Axle	444	19	15.1	13.3	6.6	0.3	15.1	20
Emmforce Autotech (SME) ^	126	3	0.4	19.2	10.2	2.2	10.9	34.5
Talbros Engineering	689	4	4.1	10.7	4.4	0.8	14.4	19.1

Source: Ace Equity
^ Listed in FY25
*As of 9 Dec 2024

Now do note that this editorial does not imply any view on any of these stocks. These are not stock recommendations.

As discussed above, insider buying in the different companies in a common industry segment within a month is something to take note of and deserves further research.

By the way, if you find this tool interesting and are planning to use it in your research, here is something you should be mindful of...

First, the quantum of buying. The higher the better. The more the percentage increase in promoter's stake, the stronger a signal it is.

Second, this data is more meaningful in the case of smaller firms which are less well tracked.

Third, avoid conflicting signals. If there is both selling and purchasing happening the same day or in a short period of time, it is a weak signal.

On the other hand, if you see recurring buying action, even as stock price inches up over time, it is a good clue to dig further. Similarly, if multiple insiders are buying in a short period of time or around the same time, it is a strong signal.

Fourth, look for trends. For instance, if you see insider buying happening across multiple companies under the same industry or sector, it could be a sign of a turnaround or promising growth prospects for the sector itself.

Here is quick rule - SMART CLUE - to make sure you don't miss the important points while tracking insider buying.

S	Size of the trade (increase in share with buying)- Percent increase in stake , the higher the better
M	Marketcap/Size of the firm - Lower is better to exploit information asymmetry
A	Avoiding conflicting signals- simultaneous buy and sell patterns in very short intervals
R	Recurring buying pattern at gradually increasing prices, a positive
T	Trends in Industry /Sector in Insider Buying/ Multiple cases of insider buying in same industry
C	Clustered Trades - If multiple insiders are buying, it’s a stronger case
L	Low/Attractive Valuations , a positive
U	Underlying fundamentals
E	Quality of Executive Who is Buying - Informational Hierarchy

Source: Equitymaster

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Warm regards,


Richa Agarwal
Editor and Research Analyst, Hidden Treasure
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)