But while directors’ dealings can be a useful indicator of when to buy and sell shares, that’s not always the case. Directors may benefit from an information advantage, but they can also suffer from confirmation biases and end up making bad investment decisions. After all, they’re only human and they make mistakes just like the rest of us.

Below, I’ll take a look at whether investors should follow directors into buying Laird (LSE: LRD) and Barratt Developments (LSE: BDEV).

Profit warning

Laird’s shares have lost more than half of their value since the start of the year, as the wireless technology company warned of very challenging trading conditions in its Performance Materials division. Because of delays in the smartphone cycle and uncertainty in demand from mobile device manufacturers, the company lowered its expectations for full-year underlying pre-tax profits to around £50m, down from £73 million last year.

A turnaround won’t be quick or easy, but Laird’s chief executive and the chief financial officer seem confident given their latest share purchases. CEO Anthony Quinlan and CFO Kevin Dangerfield took advantage of the latest profit warning to purchase 20,000 and 10,000 shares, respectively.

It’s difficult to tell whether these two directors are trying to shore up confidence in the company’s shares or genuinely believe its shares are undervalued. Personally, I think the stock does offer real value and reasonable turnaround prospects. Laird is currently trading at 11.2 times its much reduced 2016 expected earnings, which gives investors a wide margin of safety and plenty of potential upside if a turnaround does indeed materialise.

Right now, the stock is even cheaper than in the immediate aftermath of the profit warning, with shares in the company trading at 155.4p, around 8-9% less than the price the directors paid.

Brexit hit

Directors in Barratt Developments seem to be optimistic about their company too. On 21 October, chairman John Allan purchased 20,000 shares, while non-executive director Richard Akers bought 10,000 shares.

The housebuilder, like most of its sector peers, was badly hit by the Brexit vote on 23 June, and shares in the company remain well below their pre-Brexit peak of more than 673p in September 2015. Despite this, city analysts are relatively sanguine about the earnings and dividend prospects of the company. After a 22% rise in underlying profits in its 2016 financial year, they expect the company to report a mere 4% decline in earnings this year, with forecasts of a 7% recovery for the following year.

These forecasts imply shares in Barratt trade on a forward P/E of 9.0, with valuations falling to just 8.4 times on its forecast 2018 earnings. Moreover, given robust cash flow generation and a robust balance sheet, because of resilient residential property prices in the UK, shares in Barratt have a prospective dividend yield of 7.4% for 2017 and 2018.

The post Should you follow directors in buying these 2 stocks? appeared first on The Twelfth Magpie.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Bubble trouble

Arguably, we’re now in a 20-year house price bubble, driven by the steady decline in interest rates since the base rate topped out at 12% in September 1992. Since the Millennium, central bankers have responded to successive crises by slashing base rates and mortgage rates have followed: last week Yorkshire Building Society launched the market’s cheapest two-year fix, charging just 1.17%. Today, property portal Rightmove reports that UK asking prices hit a new record of £308,151 in May.

Cheap borrowing has also driven the share prices of major British builders. Barrett Developments (LSE: BDEV) is up a market-thrashing 347% over the past five years, 116 times the growth of the FTSE 100, which rose just 3%. Persimmon (LSE: PSN) rose 291%, while Taylor Wimpey (LSE: TW) beat them both by soaring a rip-roaring 357%. Can it last?

Full house

Cheap money is only partly to blame. The soaring population has also fuelled demand for housing, as has the buy-to-let bonanza. That source of growth is now imperilled by Chancellor George Osborne’s targeted tax crackdown, although first-time buyer schemes such as Help to Buy may replace lost demand. 

At some point, the craziness has to stop. Interest rates can’t go any lower. The affordability ceiling must be close, given stagnating wages. The property industry is now waiting to see the impact of the 3% surcharge on buy-to-let and second home purchasers. There was a surge in sales in the run up to April, and early signs suggest demand has since dipped. It may only be temporary.

Building design

Demand for housebuilder shares has also dipped, with recent performance figures indicating a sector that may just be running out of juice. Barrett has seen its share price fall nearly 6% in the past 12 months, despite announcing an improved sales rate in the first 19 weeks of the year, as well as reporting “strong” market conditions with “good levels” of demand for new homes.

Barrett, which is aiming to return a generous £678m to shareholders over the next 18 months, may have been punished by wider forces, such as fears over the impact of the Brexit referendum, higher building costs and the harsher tone on buy-to-let. 

Party not quite over

Persimmon has fared better, rising a steady 8% over the last year. Rising demand, cheap mortgages and historically low cancellation rates have kept the party going. It’s the same story at Taylor Wimpey, which is benefiting from healthy demand for new-build housing and also boasts a strong forward order book and high-quality land bank.

Some analysts have said the sector looks potentially overvalued as measured by price-to-book and cyclically adjusted price-to-earnings, but today’s P/E ratios hardly look demanding, with all three trading between 11-12 times earnings. Only an interest rate hike could inflict serious damage on the sector, but there’s little sign of that. I wouldn’t sell these stocks, but given the cyclical nature of the sector, I wouldn’t buy them today either.

The post Should you flee Barrett Developments plc, Persimmon plc and Taylor Wimpey plc before the housing market collapses? appeared first on The Twelfth Magpie.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.