by Travis Johnson, Stock Gumshoe | January 20, 2012 4:04 pm
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Hi Travis,
Off subject:
I filled out a contact us form and want to make sure you read it. It’s kind of important (lol).
thanks
/ray
Thanks Ray
Travis,
You say, “I don’t find the insider selling to be particularly worrisome for a newly public company, since that’s half the point of going public (to cash in some of the equity from the company you built) … though of course, insider buying is always nicer than insider selling.”
This makes you sound like a trusting innocent for you are ignoring the Asymmetric Information Discount (AsID).
Consider the following experiment: You take out your wallet, declare to a group of strangers that it contains $500, and ask them to bid for it. Normally no one bids $500 and the average bid is usually much less. The difference between $500 and the average bid is the AsID in this case. It arises from the bidders’ suspicion that you know something they don’t about the contents of the wallet.
Most IPOs are issued at a discount for the reason that investors may rationally suspect insiders of knowing something they don’t. (Why cash in now? Do insiders believe the firm to be overvalued? Would they be selling if it weren’t?). The AsID problem also confronts follow-on issues which we can call SEOs – seasoned equity offerings. There is a large literature which shows that the AsID produces negative filing date returns unless the issuing firm can make a credible case that the proceeds of the offering will be used for making valuable investments rather than purchasing insiders’ stocks.
In view of all that, RPX’s record of insider selling is something that would worry me more than, apparently, it does you. (Unless they need cash for current consumption, why do its insiders not think RPX is worth investing in, i.e. is better than the alternative uses of cash that they may receive from the sale?)
What color was the wallet???
When I did this experiment with my MBA students, my wallet was brown.
What was their bid? Did you convince them that they would really get to take the wallet? How about the winners get X points added to their grade? Would that increase their bid?
The average bid was $150 in a range between 0 and $350. I didn’t take it any further than that because the object of the exercise had been achieved – to wit – demonstrating the existence of an AsID. There is a sizable academic literature that investigates, among other things, what firms contemplating SEOs might do to mitigate it. As to your questions: yes, providing an incentive of the sort you describe would probably have raised the bid but not all the way to $500, the actual contents of the wallet, which only I knew. Making a offer of exchanging grades for money would also have got me fired. Ethics are important at Columbia University.
Suppose the wallet itself is worth more than the contents? RPX has a unique business model. The concept has, at this point, perhaps more value than the inventory of patents. Consequently, the lack of insider purchases at this juncture does not prevent me from purchasing this company at the current offering. A truly unique business has the ability to do very well; not only domestically, but globally as well.
Suppose, indeed, everything you suggest. Suppose, in fact, that RPX has a unique business model and that the concept has, at this point, perhaps more value than the inventory of patents. Suppose, finally, that insiders are selling.
Doesn’t it worry you that they do not see the value of the concept that you do? What is it that they know that you don’t? In view of these worries, why are you willing to “purchase this company at the current offering”?
Is there a P&F chart on this yet? Too soon?
Well! Some directors in the company have bought around 55,000 shares in Nov.2011 between $14 & $15. Do they know something better because they own the wallet?
Ah,
If indeed insiders are selling, then I’d agree with you, Professor. I have not yet seen that data. If I missed it, then I would also sell my stake.
Insider selling is the base state of most stocks and of the market as a whole. Patterns of insider selling can be worrisome, but the research (limited though it is) on this point makes clear that patterns of insider buying DO tend to indicate a stock that will go up; patterns of insider selling do NOT tend to indicate a stock that will go down. Insider buying has some predictive power, insider selling does not. Theoretically, I agree that insider selling should be worrisome — but unless there’s updated research I haven’t seen there is no compelling evidence that it has an impact on share prices.
I generally worry less about insider selling with newly public companies, because insiders at these companies are almost always substantial sellers. That said, it’s also important to be aware of the insider selling patterns — particularly the lockup period, since insiders are forced to hold for a set time following the IPO and the shares tend to suffer after that. The broad strokes research on IPOs indicates that buying them roughly six months after the offering is typically better than buying them at the IPO, since they tend to face selling pressure after the initial enthusiasm and after the insiders get their first chance to sell. That doesn’t mean that an IPO is necessarily a good deal, or that stocks don’t go down after follow-on offerings — they usually do, and IPOs usually dip on a fairly predictable pattern, but that doesn’t mean the company isn’t worth investing in after those events have occurred.
I will note that I like that a board member stepped up with a fairly substantial buy, and that the venture funders have not been aggressive sellers since the IPO — there could well be more selling pressure if the insiders and early backers decide to sell, but I think the dip late last year and the continuing revenue growth provide a good opportunity to buy a stock that is not yet priced for the kind of growth that they’re showing.
It is, of course, risky to buy a new and not-yet-proven company, though I’m more worried about their fundamental performance and their ability to renew clients than I am about insider sales right now.
Travis,
I’m glad you stepped in and wish to concede the floor to you.
I’m not sure about the point that insider selling has no impact on share prices – but I agree wholeheartedly with your second and third paragraphs. Let me note that I wasn’t talking about IPOs but, rather about follow up issues – SEOs, where I think the issue of insider selling is more important.
Sudhir,
Yes, the directors, as owners of the wallet, may be assumed to have access to privileged information and, therefore, to be asymmetrically well informed.
I liked Travis’s original analysis and decided to nibble at RPXC. Over the past few days have accumulated a reasonable amout at a $16.64 basis. I usually divide my buys into 3-5 batches over several days.
Thanks Travis. Btw I searched for this article using ‘RPXC’ on your site and there seems to be no way to locate the symbol other than opening up several articles to find the proper one. Perhaps, since the search function does not apparently scan text, you might include the symbols somewhere in the Title? Unfortunately the latter defeats the thematic literary function of ‘sleuth’ since many will just look at the titles rather than read. Best to everyone,
/* Phil */
Accumulated some RPXC back in January at a $17.10 avg, and never was too concerned about the stock’s performance until it hit $13.90 in May followed by a low of $9+ earlier this month. It appears to be recovering now. I like their unique business model despite its disappointing Q2 report, and have decided to be patient. Anything to add on this stock since your review in Jan? Much appreciated.
PS agree with Phil on the search. I recall reading a 2nd article on RPXC where you made a quick buy-and-sell, but can’t seem to find that article using ‘RPXC’
The search is probably imperfect, and the main search box doesn’t search Irregulars content very well — you have to use the second search box below it (on most pages) for the password-protected stuff, we haven’t been able to get a better search solution that works yet.
That said, I haven’t ever written anything else about RPXC and have never personally traded the shares, so maybe you’re mixing it up with another stock that I’ve dabbled in? I haven’t looked at this one in a while, will try to check into it.
My bad Travis. Confused this stock with the problem I had searching for your buy-and-sell snippet on Gold Standard Ventures. Having said that, looking forward to any fresh info you may have on RPXC in terms of potential growth, subscribers, etc.
They clearly disappointed with their forecast, but not sure why it fell quite so hard — each customer adds so much marginal earnings growth that the customer growth number for them is really key.