No one knows a company better than its insiders. For this reason, it's my view that prices at which companies and their insiders buy and sell stock give a hint about a company's true value.
The first clue for Riot Blockchain, Inc (RIOT 9.04%) shareholders appeared on Dec. 18. It announced an agreement to raise $37 million by issuing stock and warrants at a deep discount to the then-current stock price. That it could only issue stock in a negotiated transaction at a deep discount says a lot about what it's really worth.
Somehow, shares actually traded up on the news, perhaps because an equity raise -- no matter how low the price of $22.50 per unit -- gave Riot some semblance of legitimacy.
But while shareholders could shrug off a discounted stock sale as seemingly bullish, the market will likely view recent insider sales with more skepticism.
Image source: Getty Images.
An insider dumps his shares
Right before a holiday weekend, and two days after the company announced it was adjourning its annual shareholders meeting until February, Riot Blockchain's chief executive officer, John R. O'Rourke III, filed a Form 4 with the SEC disclosing he and his firm, ATG Capital LLC, sold 30,383 shares of Riot on Dec. 29.
|
Holding type |
Number of shares sold |
Average sales price |
|
Common stock held personally |
19,583 |
$28.45 |
|
Common stock held by ATG Capital LLC |
10,800 |
$28.90 |
|
Total (weighted average) |
30,383 |
$28.61 |
Source: Form 4 filing, total and weighted average calculated by author.
These sales are material, representing about 37% of shares he and ATG Capital owned or would soon control prior to the transactions.
O'Rourke now holds 12,500 shares through ATG Capital LLC, in addition to 39,500 shares of stock in his own name that he currently owns, or will receive over the next 60 days from his role as Riot's chief executive officer. (O'Rourke received 344,000 restricted shares that vest in 24 monthly installments when he became CEO in November.)
Hiding bad news
These sales were curiously timed. O'Rourke sold his shares and filed the Form 4 after market close before a major holiday weekend, when most investors would be thinking about their New Year's Eve plans rather than their investment portfolios.
Stock analysts, journalists, and political-types refer to this activity as a "Friday night dump," a common practice of releasing otherwise newsworthy information at a time when people are least likely to be paying attention. One study from 2005 found that "Friday announcements are 20 percent more likely to present negative earnings than announcements on other weekdays." Insider selling certainly fits in the "negative" category.
O'Rourke has every reason to sell quietly. When taken together with Riot's deeply discounted equity raise earlier this month, his sales suggest recent market prices are a better price at which to sell its shares than buy them. It's also interesting to me that O'Rourke is selling before a postponed annual shareholders meeting in which Riot is asking shareholders for the right to add another 750,000 shares of stock to the company's bonus pool for insiders.
If I were a Riot Blockchain shareholder, I'd follow in management's footsteps and sell my shares, too.
