Last week, golf equipment maker Callaway Golf (MODG -4.09%) announced that the chief executive officer and chief financial officer had purchased shares of the company for their own personal accounts. Since insider buying tends to signal that management believes its shares are undervalued, the market reacted positively to the news -- its shares jumped more than 5% the next day. 

But before investors blindly follow management's actions, let's take a deeper look. 

A large Topgolf driving range.

A Topgolf driving range. Image source: Getty Images

The purchase details

Although insider buying tends to be a great sign for investors, it's worth putting some context around these recent purchases.

Chip Brewer has been the chief executive of Callaway for almost a decade, and he's received plenty of stock over that time as a part of his compensation. Thanks to these stock awards, Brewer unsurprisingly has amassed a pretty sizable holding in the company. In fact, prior to last week, he owned about $27 million in Callaway stock through various family trusts. With this in mind, Brewer's recent purchase of just 4,000 shares, or roughly $100,000 worth of stock, is probably more symbolic than significant.

On the other hand, Chief Financial Officer Brian Lynch bought a much more substantial position relative to his previous ownership. According to the company's latest proxy statement, Lynch owned about $2.3 million in Callaway shares. His purchase, announced in the filing last week, will add another $387,000 to his overall holdings.

Why Callaway and why now?

Over the past 12 months, Callaway has seen stellar performance across all operating segments. With interest in golf reportedly at all-time highs, third-quarter equipment and apparel revenue was up 10% vs. the same time last year and 23% higher than the third quarter of 2019. On top of this strong sales growth, Callaway has also doubled its third-quarter equipment and apparel operating income over the last two years. 

Yet despite this year's impressive results, the stock is still roughly flat over the past 11 months. This has left the company trading at a price-to-operating-cash-flow ratio of about 12. So from a pure valuation perspective, the stock looks reasonably priced given its steady growth. 

But there's likely more to it. Though it's impossible to know the exact reasoning behind both executives' purchases, I imagine it may be linked to performance of the company's recently acquired golf entertainment brand, Topgolf. Following the close of its acquisition in March, there was some uncertainty around whether Topgolf could get back to its sales level in 2019 before COVID-19 put a halt to the many corporate events that had been a sizable share of its revenue.

But last quarter, this uncertainty was put to rest as Topgolf recovered to more than 100% of that level, and the division is now the leading contributor to Callaway's overall revenue. With existing venues operating at record levels and Topgolf set to open another 10 sites next year, it's hard to imagine its success wasn't a major contributor to management's decision to purchase more shares.

What does this mean for shareholders?

There's an old saying in investing that executives sell shares for many reasons, but only buy for one. So at a minimum, this insider buying should be a vote of confidence for shareholders.

But it isn't just executives who seem to think Callaway's shares are undervalued. Shortly after these purchases, the board of directors authorized a new $50 million share repurchase program. Though it only amounts to less than 1% of the company's current market cap, it's an encouraging sign to see Callaway setting aside some capital for repurchases since it has promising reinvestment opportunities elsewhere in its business.

All in all, between this buyback program and the recent management purchases, it's clear that the individuals who know Callaway the most intimately think it's an opportune time to own more shares. For investors, this should certainly be a positive sign.