Reading the Tea Leaves

A while back a friend lamented the decline in his company’s stock despite reporting solid quarterly earnings.  My friend’s company had been the target of an activism campaign during which the activist gained board seats.  This led to a transformation at the company, with a new CEO being named and the departure of several of the old senior management team.  Of course, the company also divested assets and cut staff.

These strategic moves appeared to be generating positive momentum for the company but not apparently for the stock.  My friend – a survivor of the turmoil – was puzzled why the stock was languishing.  So, I took a look at the company’s trading.  Their stock price was down, but what piqued my interest was the elevated trading volumes.

Now, trading volume has a story to tell, you just have to read 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 later in the fall after the 13F/G/D filings came out.  The filings showed that the 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 fundamental investor outreach program during this time would have mitigated the decline or shortened the time the stock was drifting.