Why Is That Institution Selling My Favorite Stock?

Long-time readers should note some significant changes in how I communicate in the public domain. The primary purpose of this forum is now to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.

Accordingly, this document should not be construed as an endorsement or recommendation of the companies or securities discussed herein. I am not an investment advisor and this is not an investment thesis. It is merely one part of the story, which I present for debate in hopes of determining all risks and upside potential. The disclosure at the end of this piece is critical to understanding the content of this document. Further, I frequently trade my positions and may buy, sell, or short the securities mentioned herein at any time, regardless of the facts or perceived implications of this article.

 

This will be a short post / lesson.

Peter Lynch (a legend and one of my early idols), was noted as saying that “insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.”

After 25+ years in the business, I can tell you that the same goes for institutions.

Virtually anything can cause an institution to sell, but they only buy for one reason (to make money). The reasons to sell can vary quite a bit… and many of them have nothing to do with the company’s valuation or prospects for growth.

  • The key analyst or portfolio manager leaves the company
  • The institution is restricted from owning stocks that are/fall below a certain price or market cap.
  • They feel that a round of funding is coming and decide to trade out of their position

 

As a result, investors are ill-advised to confuse institutional selling as a data point or a substitute for research.

As you can see above, the selling might be for a non-fundamental reason. Further, by the time you receive the information, the trade may be several months old. Finally, most institutions don’t beat the market by a wide margin.

In other words, even when they make a fundamentally-based decision, they are often wrong.

Thus, worrying about it (or worse, spending valuable time trying to figure out why) is a fruitless use of energy… and can cause you to miss out on a profitable investment.

This all reminds me of Unterberg Capital’s Q1 sale of its position in Smith Micro (SMSI). When investigating the reason (which I only did to serve as an example of how futile it is), I noted three things in particular:

 

1) According to someone who has known Tom Unterberg for decades, the man is 86 years old and “beginning to make some changes”. I couldn’t get much more information than that, but it suggested that selling SMSI has nothing to do with SMSI.

 

2) My research leads me to believe that Unterberg saw the March round of funding coming and decided to get out of the way. To be honest, I would have done the same (and then participate in the round or buy my shares back after the round was complete). However, I was under NDA and believed it would be illegal / unethical to sell out.

Anyone who knows how I feel about SMSI should understand the point here. Expectations of a near-term supply-driven decline is share price is a good reason to sell (at least temporarily), but says nothing about the company’s prospects or valuation.

Also, in this case, word of Unterberg’s sale came too late, since SMSI’s rounds of funding are complete.

 

3) Finally, a quick look at Unterberg’s recent sales confirms my point about institutions often being wrong. The following graphic speaks for itself:

Unterberg

 

Conclusions: The lesson here is simple. Researching why Unterberg sold did nothing to increase our knowledge of SMSI. It’s true that this information might ease some concerns. However, “concerns” are for investors who don’t build conviction through research…

…and you can’t do research if you spend all your time worrying about what everyone else is doing with your favorite stocks.

Aside from serving as fodder for this lesson, I feel that the time spent researching Unterberg’s sale was completely wasteful. So, I hope the lesson is worth the time spent assembling it, because I have real research to do.  ;^)

 

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The primary purpose of this blog/forum is to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.

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23 thoughts on “Why Is That Institution Selling My Favorite Stock?

  1. Love it. I only care about sells by institutions in my holdings that I want out if I know they were being opportunistic for warrants. Once they are out I usually buy again knowing their dump in supply is over.

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    1. That’s smart !

      It feels like we’re right around that point now. Relative to the size of the recent offering, the short interest has picked up by a commensurate amount.

      The timing is lining up well. Safe & Found is finally ramping up and Sprint is about to roll out it’s broad public marketing initiatives in the coming weeks. Cheers.

      Like

  2. I see your point, but what if you had uncovered a reason for the sale that was new information about SMSI that you had not yet uncovered in your research? Have you been able to get information like that about institution sales and purchases before? I would think so as long as it was after they made their move.

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    1. In 25 years, I’ve rarely discovered anything substantive, unless I personally knew the institution.

      If there’s some unknown negative, the broker / trader is more likely to get that info than I am… and if that happens, word can quickly spread and get priced in.

      Time is better spent beating them to the punch by focusing on your own research. In contrast to the rare institutional find, I can’t count how many times I’ve dug up something that new nobody else knew.

      One of the biggest syndromes among retail investors is fearing the unknown, especially when a stock is moving against them.

      Unfortunately for them, conspiracy theories are rarely real so they end up getting shaken out at the exact time they should be buying.

      Like

  3. I think the point that Mark is trying to make is that everyone has their own reasons for buying or selling a stock. The point of this forum is not to list out all of the reasons why other institutions or other people have certain viewpoints on a stock – rather it is to research findings to maintain and have resolve over our own investing decisions. Only then can we truly have conviction in our investments.

    I’ve started to realize a pattern – and please let me know how you feel about this Mark but this blog is much more than just Mark’s personal basket of interesting stocks. He’s setting us up with the fundamentals of how to do our own research. Making money is a consequence of research done right.

    Just a message to everyone else here – if the only thing you’re after here is making money, you can turn off your brain and invest money in everytime Mark finds a new potential company to research. You will probably still beat the average market return. However, I believe the real value in this service is to learn how to perform the sort of analysis and research that Mark does and shares with us.

    Liked by 3 people

  4. “I’ve started to realize a pattern – … He’s setting us up with the fundamentals of how to do our own research. Making money is a consequence of research done right”
    YES – I got lucky with SiriusXM buying in late spring of 2009 because I thought it was a Monopoly and wasn’t sure but thought it might survive. Still holding. So I know Mark talking about risk/reward is correct. One can make a lot of money on turn-around or new/undervalued companies. I have bought way too many turn-around that failed and lost it all because I didn’t sell out at a loss and held to the bitter end. Now being a older and reading Mark’s words I realize that every risky company (I set aside 10% of my IRA for risky companies with none more than 1%; except that SiriusXM grew into a non-risky large position) I buy should be 1) small position relative to my overall portfolio 2) set some sell out price both above/below purchase price (not automatic but where I would get a notice from broker that it closed at set price and then it’s time to re-examine and possibly put in a sell order). I have lost money because I didn’t sell after the price tripled (Greedy) and now am in a losing position with a few stocks; thankfully less than 1% was put in at the initial position – still hurts emotionally. One may believe in a company/management but either the company delivers or it doesn’t – I have to take my emotions/feelings completely out of my investing.

    Liked by 1 person

  5. Mark, do you know the size of Underbergs posn prior to any selling and do we know the size of the remaining shares, may help just a bit in determining how much more is in the pipeline or at least a reasonable assumption.

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    1. They’re 100% out as of Mar 31.

      I believe the current selling is likely from last week’s offering. The prior offering took 10 trading days to digest before the stock started to rebound, but the short interest spike is already consistent with the last round (adjusting for the size of the round).

      Those sales are likely blind (with the intent of keeping the warrant with a cheap cost basis).

      With Sprint just weeks away from launching its broad marketing campaign, the resolution of this supply/demand issue should finally set the stock free to trade toward its fair value, especially as the product becomes more public.

      Like

      1. I agree.
        One would think the kick off to the Safe and Found campaign would also come in the form of a formal PR that would hit the WS newswires for new investors to see……..that would be major IMO.

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  6. Hey Mark,

    Hoping you can help me out with a data point. I’m finishing up my model after Q1’s CC and just need a bit more clarification regarding one point;

    Management had previously stated that they are expecting 3.5M of revenue per quarter from S&F. Do you know if this is based on the assumption that all 350k of Sprint’s legacy subs will convert to S&F? Are they also including additional new users added to get to this 3.5M number?

    I ask because, if they assumed 3.5M is coming only from Sprint’s Legacy 350k subs, at a 70% conversion rate (to the new platform), this works out to be $14.3/user each quarter (or $5/month). This seems way too high considering Sprint is only charging their customers $6/month. So I want to assume they’re also including additional new users in that 3.5M estimate, but wasn’t sure if this is the case.

    Can you let me know if you’re aware of how they derived the 3.5M in revenue forecast? I’ll share my model with you and everyone here once done (hopefully this weekend), so we can sanitize together 🙂

    Like

    1. Discussed in my Q1 writeup, 3.5M is based on full conversion (which won’t happen). However, new users will quickly pick up the slack. I’ve heard that new customer signups are already tracking well (all things considered).

      I’ve also heard that Sprint wants to double the base in one year (700K) and get to millions (let’s say 2M) in a few years (let’s say 3-5).

      If we lop 33% off of each of these numbers, it’s still fantastic. Gross margins 80% – operating costs of 10% drops 70% of each new dollar straight to the bottom line.

      Like

  7. Why would an institution sell the stock? Institutions are better suited and rightly so to following the results or numbers. Not the might happen numbers, but actual results. SMSI has not ramped up YET with Safe and Path and they’re quarter is less than impressive. SMSI is also on the verge of maybe being very successful. Institutions don’t want to bet on maybe. However, they will join the game in a quarter or two when everything is on track and the results are there. In the meantime, Mark has given us a huge opportunity to buy in the $2 range and the information to help us see why the stock has a good probability of doing well. I do not mind doubling up a couple of times before the institutions.

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    1. Many institutions only do the deal for the arb. They know almost nada about the company and don’t care. Honestly, I can’t blame them. I’m going to open some accounts at small brokerages that tend to offer deals like this. I’ll do some for the arb of the company looks mildly interesting. If the warrants are cheap/free, the ones that pan out will make it all very worthwhile.

      Like

  8. Mark, given this bull market we are still in, I’ve noticed these arbitration type deals are great ways for investors with a lot of capital to make quick beaucoup bucks.

    Now back to SMSI: I noticed the last deal in March where the arbs took the price below their $1.75 buy-in to a low of about $1.45 which equates to about a 18% drop. If we apply this formula to the current arb scenario of $2.21, an 18% drop would put the stock at $1.81. If you apply the same equation to the warrant price of $2.11 you get a low of $1.73. It just so happens that the low of $1.73 was hit yesterday. Coincidence? I don’t know and am admittedly not an expert on what is considered a normal arb procedure. However, if recent history provides a reasonable benchmark, then I’m thinking we have hit bottom and will likely take about 3 to 4 weeks to reach the range of $2.11 to $2.21 again. Could happen sooner as we are anticipating the official Safe and Found kick off to the Sprint retail sales team near the end of the month.

    Does my reasoning seem sound to you or do you feel there is a far different plan of what the arbs are up to here?
    TIA

    Like

    1. That’s one way of looking at it… and not a bad one. But you have to adjust for the above-market pricing and the value of the warrants (to figure out the value of the arb and therefore what percent of the investors might have invested solely to arb it out).

      FYI, the short interest is now dollar-for-dollar in-line with where it was in the wake of the last one. Another sign we might have bottomed.

      Yet another stat is that the stock started rebounding ten days after the March offering. This time around, that day is this Thursday.

      Many things pointing to the stock being bottomed / near bottom. With catalysts coming, the shares should start moving.

      Of course, that’s all just trading fodder. I’ve owned shares since August because of the business and what they think they can become vs. the risk/penalty if they don’t.

      Liked by 1 person

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