Reading the Tea Leaves

Last summer, my friend lamented the decline in his company’s stock despite reporting solid quarterly earnings.  I initially brushed off his remark with the old “buy on the rumor and sell on the news” adage.

But, of course, there was more to it than that.  My friend’s company had been the target of an activism campaign for the last two years.  It was a fairly typical activism story – the activist gained board seats, the new CEO remade the C-Suite and the company divested assets and cut staff.

So, a few days later I looked at the company’s trading.  Their stock price was down, but what piqued my interest was the elevated trading volumes.  Thanks to the team at Modern IR, who do a great job explaining market structure, I know trading volumes have a story to tell.

So, I began reading the tea leaves.  The company’s 30‑day trading volume was roughly 35% higher than both its 90- and 180‑day average trading volume. Neither the S&P 500 rebalancing nor an industry disrupter buying a prominent distributor could explain the sustained higher volumes.  I suspected a major holder was taking their position down. Trading bots, sensing the increased liquidity, were trading the same shares over and over, keeping volumes elevated.  Meanwhile it appeared fundamental investors were on the side lines as the stock drifted downward over the next several weeks and trading volumes returned to historic norms.

My suspicions were confirmed after the 13F/G/D filings came out.  The filings showed that the company’s activist investor had reduced its position by roughly 60%.  The company’s stock price firmed a few weeks later when the CEO presented at a high-visibility investor conference.  Essentially, fundamental investors appeared to have woke up and began setting price again.

Hindsight is 20/20, but I think this example illustrates how an understanding of investor and market behavior could inform investor relations strategy.  It’s hard to say as so many internal and external factors play a role, but I wonder if a more active investor outreach to fundamental investors while the activist was selling could have mitigated the decline or shortened the time the stock was drifting.

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