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. Despite its large online presence and well-known co-founder, Ruslan Kogan, Kogan.com Ltd didn’t hit the Aussie share market until 2016 — 10 years after it was founded.
Let’s just 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.
And growth did it get! At least, in the form of a rising share price. Here’s a snippet from Yahoo! Finance:
Despite the most recent sell-down, which I’ll dig into below, Kogan.com Ltd shares are a mile away from their $1.63 price tag at this time in 2017. In fact, around 360% away.
Is This A $42m ASX Trade Signal?
According to The Sydney Morning Herald, Kogan’s recent market sell-off can be attributed to the “reluctant” $42m sale of shares by co-founders Ruslan Kogan and David Shafer.
According to an ASX release, the co-founders “reluctantly” sold their shares for “personal financial commitments”.
I’ll admit it must be hard for Ruslan to part with some shares in his company. And it may have something to do with his $40 million Toorak mansion.
(Ironically, that was also an “off-market sale”, according to News.com.au.)
But what’s concerning to me, as an investor in public shares, is that the Ruslan and Shafer allegedly “tested” the market to sell up to $100 million of their shares just a week ago.
I should mention that 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.
1 Thing Investors Should Never Forget
I never use ‘signals’ to ‘trade’ shares. Instead, I buy parts of companies for the long term. Finding management is one of my 4 steps.
A red flag is raised each time a CEO or director sells a stake in their own business.
There’s a saying, ‘Managers 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.
Now, managers who sell shares often speak of ‘a large tax bill’, ‘diversification’ (I’ve heard that one too many times), ‘a divorce’ or something else.
I’m not certain what “personal financial commitments” really means, but I would have thought that Shafer and Ruslan are not exactly hard of a dollar. In 2017 they each took home salaries in excess of $400,000 and much more in dividends. (and good on them for doing so!)
So why do investors pay attention to these things?
Insiders, by that I mean the directors and employees of a company, can know more about their business than we ever could from the outside. Admittedly, not every director makes for a decent investor, but at the end of the day, they’re selling — not buying — and they have access to all of the information.
As you know if you read my article, Better Than Warren Buffett: How $10k Becomes $500m, there are three commonly accepted ‘edges’ in investing and one of them is access to better information. Better information gives insiders a better chance of being successful at investing, in my view.
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.
And the Kogan.com Ltd founders still own bucket loads of shares in a company that seems to be growing in spite of competition.
Having said that I’m not an owner of Kogan shares today. Not only because of the recent insider sale. I’m simply waiting to see how the Amazon arrival plays out. Patience won’t lose me money.
However, I am 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.