A $42m Red Flag
From June 4th until this morning, shares in online retailer, Kogan.Com Ltd (ASX: KGN), fell from $9.75 to $7.29 – a 25% haircut.
Kogan sells everything from watches to TVs and insurance. It’s really well known for doing so.
Despite its large online presence and respected co-founder, Ruslan Kogan, Kogan.com Ltd didn’t hit the Aussie share market until 2016 — 10 years after it was founded.
Let’s agree the ASX listing had nothing to do with Amazon.com’s looming arrival in Australia and accept the party line that it needed more capital for growth.
Growth it got.
Here’s a snippet from Yahoo! Finance showing the company’s share price:
A $42m Red Flag?
According to The Sydney Morning Herald, Kogan’s recent sell-off can be attributed to the “reluctant” $42m sale of shares by co-founders Ruslan Kogan and David Shafer.
In an ASX release, the co-founders “reluctantly” sold their shares for “personal financial commitments”, the company said.
I believe it would be hard for Ruslan to part with shares in the company he started.
(as an aside, it may have something to do with a $40 million Toorak mansion. Ironically, that too was an “off-market sale”, according to News.com.au.)
But what’s concerning to me, as an investor in public shares, is that the co-founders allegedly “tested” the market to sell up to $100 million of their shares just a week ago, according to Fairfax.
Insider selling is a big red flag for me.
(It’s worth noting the duo still own 41% and 12% of the company’s outstanding shares, respectively. Meaning, they have considerably more skin in the game than your average Aussie director.)
Following Smart Money
I never use ‘signals’ to ‘trade’ shares. Instead, I buy parts of great companies for the long run.
Part of my four-step process is finding talented management. It’s management who drive a company to success.
So when management sell shares in a company they run a red flag is raised.
There’s a finance saying, ‘management buy shares for one reason, they sell for many‘.
Ask yourself: Why would a CEO sell shares in his or her own company? The simple (and correct) answer is this: because he or she thinks the money is better spent elsewhere.
Managers who sell shares often speak of ‘a large tax bill’, ‘diversification’, ‘a divorce’ or something else.
The reason could be valid. But I’ve found, on average, too often these seemingly unavoidable costs coincide with poor business performance.
More Than Coincidence, An Insider’s Advantage
Insiders, by that I mean the directors and employees of a company, often know more about their business than sharemarket investors ever could from the outside.
Admittedly, not every director makes for a decent investor. But at the end of the day, management is selling — not buying — and they have access to all of the information.
As you will know if you read my article, Better Than Warren Buffett: How $10k Becomes $500m, there are three commonly accepted ‘edges’ in investing. One of them is access to better information.
Better information offers company insiders a better chance of being successful at investing, in my opinion.
Where to from here
Let’s be honest, if the company I started was now worth around 400% more than it was a year ago I’d cash out some of my chips, too. Especially if Amazon just took a seat at the table.
I’m not an owner of Kogan shares today. Not just because of the recent insider sale. I’m waiting to see how the Amazon arrival plays out because at the end of the day, patience won’t lose me money.
1 Small Cap I’m Buying
Recently, I became an owner of another ASX small cap whose founder recently sold a small portion of his shares. Due to Rask Group’s trading rules I can’t reveal the name, but I’m very comfortable with the risk-reward opportunity.
Cheers to our financial futures!
Founder and Lead Advisor,
This article contains general financial information only and should not be relied upon. This information does not take into consideration your needs, goals or objectives. Therefore, you should consult a licensed financial adviser before acting on any of the information presented here. Past performance is no guarantee of future returns. At the time of publishing this article, Owen Raszkiewicz does not have a financial interest in the companies mentioned.