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FTSE 100 stock IG Group (LSE: IGG) has taken a hit recently. After rising above 1,900p in mid-June, it has fallen below 1,400p.
What’s interesting is that the stock just saw a massive insider purchase. Could this be a signal that it’s oversold and about to rebound?
Why is the stock down?
On 31 July, IG shares fell 14%. The reason they tanked is that the company announced that it’s planning to buy Underdog, a US fantasy sports and prediction markets operator.
The cost of the acquisition is set to be around $1.3bn. To fund it, IG will issue 24.1m new shares, pay $380m in cash, and take on $160m of Underdog’s debt.
A risky deal?
Clearly, the market is spooked by this deal. And that’s understandable.
While IG has made acquisitions in the past, this deal isn’t really in line with its core offering. Making a move into fantasy sports and prediction markets is risky.
Insiders are buying shares
IG Chair Andrew Barron clearly believes the market has got it wrong, however. Because he’s been buying shares in the company.
On 10 August, he snapped up 36,416 shares at a price of £13.72 each. This trade cost him £499,507.
Notably, he isn’t the only director that has bought stock recently. On 7 August, CFO Abrahams Clifford bought 5,000 shares, while on 10 August Independent Director Helen Stevenson bought 2,197 shares.
So, we have a ‘cluster buying’ pattern – where multiple insiders are buying simultaneously. And that can be a bullish signal – it shows that the consensus view inside the boardroom is that the shares offer value.
Are the shares worth a look?
Could the stock be worth considering given this insider buying activity? Potentially.
There are obviously risks around this acquisition. There are no guarantees that it will pay off (regulation could throw a spanner in the works, for example) and it weakens IG’s balance sheet in the short term.
However, the deal could end up being a masterstroke. The board believes it will:
- More than double IG’s US revenues
- Be double-digit accretive to earnings by year three
- Increase US monthly active customers more than tenfold
- Add a fast-growing, low-cost customer-acquisition channel whose revenues are uncorrelated with IG’s
- Establish IG as a leader in US prediction markets (a rapidly-growing market)
- Provide expansion opportunities beyond sport
Technology is reshaping the large, high-engagement markets in which IG operates – and increasingly bringing them together. Underdog puts us at the front of that convergence: a product-first team, a leading daily fantasy sports franchise and a full licence stack that together give us a differentiated position in US prediction markets. It expands both our addressable market and our growth trajectory.
IG CEO Breon Corcoran
How’s the valuation?
As for the valuation, IG Group now trades on a forward-looking price-to-earnings (P/E) ratio of around 11. That looks pretty cheap to me.
The dividend yield is around 3.6%. So, there’s a bit of income on offer too.
All things considered, I think the shares look quite attractive at current levels. In my view, they are worth a closer look.
Should you invest £5,000 in IG Group Holdings right now?
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Edward Sheldon does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
