I’ve been told its poor form to quote yourself…

But to hell with that!

In June, I wrote in this column that I am not a buyer of Kogan.Com Ltd shares.


Source: Google Finance. The chart shows Kogan.Com’s share price in 2018. 

Why was I avoiding Kogan shares?

Insider Selling: A $42m Red Flag

According to Fairfax reporting at the time, Kogan.Com’s co-founders hoped to sell $100 million of their shares in the company they run.

Days later they “reluctantly” sold ~$42 million worth of shares, according to an ASX filing. (Note: they still hold a substantial number of shares.)

But that was June. This was today (before the 30% haircut):

  • Quarterly global brands sales were down 27% year-over-year
  • “Gross margin has decreased…”
  • Marketing expenditure grew by “more than 30%”
  • Variable costs “grew by more than 40%”
  • New GST laws were introduced
  • The company received a notice from the competition watchdog (ACCC) relating to a marketing campaign

Ouch!

Follow The Smart Money…

As I have written time and again I believe there are three commonly accepted edges in investing:

  1. Informational – access to information
  2. Behavioural – the way an investor acts
  3. Analytical – an ability to understand information

An insider, like a CEO, should know everything there is to know about his or her company. Meaning, the CEO has an informational advantage. Outsiders (like small shareholders) do not have the same advantage.

So the bottom line is when the CEO decides to sell, every investor in the company should sit up and ask one thing: why? 

When I talked to leading hedge fund manager, Ben McGarry, earlier this month, he said insider selling is one of the most important red flags in his investment process.

It’s not a guarantee the company’s share price is about to take a bath. But more times than I care to remember a management team’s decision to sell has coincided with sell-offs in the not-too-distant future.

As I said in June, “management sell shares for many reasons but they buy for one”.

Of course, a CEO selling their shares isn’t always a bad thing. It’s only one red flag. But too many red flags mean investors should be prepared to walk.

It’s Not Always Bad

The first ASX-listed company I bought for the Rask Invest model portfolio is a small-ish healthcare technology company which has seen its share price explode more than 10-fold in 5 years.

The two co-founders recently sold some shares, netting themselves around $8 million each.

Since they sold (one sold most of his shares at a price of $8) the company’s share price rose another 50% before declining recently. Clearly, with the benefit of hindsight, they might have timed the sale better.

But after I first learned of the sell-down by management, I was not overly concerned about their decision.

Why?

I think these two managers have equal measures of integrity, energy, and talent. What’s more, their business has incredibly attractive economics.

Customers are sticky.

The growth runway is impressive.

The technology is best-in-class and high margin.

And the two co-founders still own more than 50% of the business.

What Now?

I’m not a buyer of Kogan.Com shares today. There is a price for everything and never say never. The sell-off could be overdone.

But as I said in June, I’m waiting to see how the Amazon arrival plays out. At the end of the day, I know patience won’t lose me money.

In the meantime, there are 5 of my #1 buy ideas sitting inside Rask Invest, which I believe are materially undervalued. I think two of them are so deeply undervalued I’m considering buying more.

Rask Invest members are always the first to know.
Cheers to our financial futures!

Owen Raszkiewicz
Founder, Lead Adviser of Rask Invest

 

This article contains general financial advice only. It should not be relied upon. Please see our full disclaimer below. At the time of publishing, Owen Raszkiewicz does not have a financial interest in any of the companies mentioned in this article. 

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