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KSW Inc. CEO Share Sales Explained Market Inefficiencies

August 10, 2010 | About:
Saj Karsan

Saj Karsan

20 followers
There are many reasons why a particular stock's price might differ from its value, not the least of which is a motivated seller. A motivated seller will drop the price of any asset (e.g. real-estate, vehicles etc.) and stocks are no exception - particularly small-caps, where a lack of liquidity can result in dramatic price drops.


Consider KSW Inc. (KSW), a stock we have previously discussed as a potential value play. The company's CEO announced a plan to exercise 105,000 of his options, and then sell those shares in the market. The announcement was made several months ago at a time when he did not have inside information. Furthermore, the rest of his 750,000 shares will remain under his ownership, continuing to leave him a stake of over 10% in the entire company.


The plan was announced in March, and resulted in almost no change in the stock price. As the CEO has been selling the announced shares, however, the stock price has been dropping. The company only trades a few thousand shares per day; therefore, selling 100K+ shares over three or four months can result in significant price movements. In this case, shares have fallen some 20% since the share sales began. Now that the sales are practically complete, the share price can breathe again, as the supply and demand of the shares of KSW are free once again to find a more normal equilibrium.


Many financial experts regard stock prices as fully reflecting the values of the underlying businesses. This assertion must be thrown in doubt, however, in cases such as this one, where shareholders controlling large blocks of shares are dumping their stock over very short periods of time. The market is not efficient here; excess supply of shares is driving down the price, offering opportunities for those who don't believe the market is efficient.


Disclosure: Author has a long position in shares of KSW


Saj Karsan

http://www.barelkarsan.com
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About the author:

Saj Karsan
Saj Karsan founded an investment and research firm that is based on the principles of value investing. He has an MBA from the Richard Ivey School of Business, and an undergraduate engineering degree from McGill University.

Rating: 4.8/5 (4 votes)

Comments

DaveinHackensack
DaveinHackensack - 3 years ago
Value trap. I've owned this before, and the stock has traded this low well before the CEO announced this latest binge of share selling. I suspect it's because the company's earnings are volatile, its backlog is liable to evaporate given another economic downturn, and there are no catalysts for growth.

Because it's a profitable but not capital-intensive company, KSW has had high ROIC in the past (haven't checked it recently) which, along with its low share price, has put it on the Magic Formula list in the past (at least before Greenblatt suddenly added the $50 million market cap minimum). But this high ROIC was somewhat misleading, because the company didn't have any way to reinvest its profits productively.

In theory, it could have done so by acquiring another HVAC business in a different city. But, if memory serves, the company was wary of making acquisitions as long as it felt its share price was depressed.

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