Capital Markets / Investor Relations in Two Minutes or Less
What Executive Stock Trades Convey to Investors
A wise buy-sider once gave me the advice that when you initiate on companies on the sell-side that your best course of action is to keep your rating forever.
What? Keep you rating forever? That is crazy talk.
Actually, the idea of keeping your rating forever makes a lot of sense.
There are two things to consider with the forever rating:
1. Consistency of message
2. Investment time horizons
It is always best to remember that investment changes and valuation changes do not really happen in one quarter, despite stock movements.
What Does This Teach Public Company Executives?
A Sell-Side Research Analyst rating on a stock is the equivalent of a public company buying or selling shares obtained as compensation for running a public company.
Buy and Selling shares represent a very powerful lever with significant downside risk for executives.
The Positive
A public company executive or board member buying shares represents a powerful message.
Investors believe this means one thing: the stock is definitely going higher.
Why else would an insider buy the shares.
The Negative
Conversely, selling shares can convey the wrong message and carries significant downside risk that can negatively impact the company and the underlying share price:
1. At Worst You Front Run Investors
2. Investors Are Left Feeling Duped
3. Management Credibility Declines
4. Selling Conveys Lack of Long-Term Conviction in the Business
5. Your Company Is Not a Good Long-Term Opportunity
What Is the Best Course of Action?
There are two primary options:
1. 10b5-1 program
2. Hold Until You Depart!
Both options prevent you from sending an inadvertent signal to investors about your company and stock.
Current Example: Transocean
In August, the CFO sold $3.4M in stock at $8.50 and the shares went to $4.50. Disastrous for investors and management credibility.
Recently, a member of the Board purchased 1M shares at $4.89, sending a strong signal that the stock is significantly undervalued. The BoD members last purchase was in the $7s
Key Learning
Trading shares represents the most powerful signal a public executive can send to investors.
Public executives trading shares need to do it with care and caution because you could destroy not only credibility, but also your stock price!
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