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:
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. ;^)
- SMSI Q1 Results: Sprint Ramp Confirmed & T-Mobile Discussed!
- “Top Ten Stocks” Update (and note to HMNY watchers): AMC & GAIA Report Stellar Earnings!
- Are SMSI’s Unlocked / Hidden Assets Worth Over $20 Per Share?
- HMNY’s ATM Offering: Where’s The Stock Going Next?
- Smith Micro Raises $7 Million (At A Premium) To Accelerate Its Momentum
- Videocast: AEHR 10-Q, MoviePass Update
- AEHR Grows 175% — Beats On The Top & Bottom Line (Buying More)
- GAIA vs. MoviePass: CAC Shows Which One Is A True Mini-NFLX
- Major Update on SMSI
- SMSI’s Safe & Found App: 100,000 Downloads & Counting
- MoviePass Projected To Burn $600M In 2018
- SMSI: Riding A New Trend & Making Its Latest Comeback
- Mark Gomes Research
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Disclosures / Disclaimers: I am long XXX. However, this is not a solicitation to buy, sell, or otherwise transact any stock or its derivatives. Nor should it be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. To be clear, I do not encourage or recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice, regardless of the facts or perceived implications of this article.
I am not a financial advisor. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this article.
I undertake no responsibility to update my disclosures and they may therefore be inaccurate thereafter. Likewise, any opinions are as of the date of publication, and are subject to change without notice and may not be updated. I believe that the sources of information I use are accurate but there can be no assurance that they are. All investments carry the risk of loss and the securities mentioned herein may entail a high level of risk. Investors considering an investment should perform their own research and consult with a qualified investment professional.
I wrote this article myself, and it expresses my own opinions. I am receiving no compensation for it, nor do I have a business relationship with any company whose stock is mentioned in this article. The information in this article is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
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.