Sink or bail water? The falling knife conundrum from the company side

shrug

Yesterday, I wrote a quick story about how Veritas Pharma (VRT.C) had jumped 15% or so after a mild sell-off the week before. By the time I’d posted it, the stock had reversed that jump and slid another 10% or so. I considered changing the story to reflect the change, but the moves were on small volume and could have swung the other way again in a single trade, so it just seemed like the best thing to do was throw hands up and move on.

But I didn’t exactly. I called a VRT insider and said, WTF bro? Who’s messing with your deal?

The answer: Some emotional shareholders had seen a slip and were bailing, which was causing more of a slip, which was causing more of a slip.

I asked why management or founders or board members wouldn’t just buy that cheap stock as it came to hand, and the answer surprised me. For a moment.

“Why?”

Not ‘why ever.’ But ‘why now?’

When a company sees this sort of irrational group-think come about, there are several ways to respond.

One is with a quick news release, hoping to push news out there to stop the bleeding and maybe reverse sentiment. But if the news is weak, or seen as a reaction and a blatant effort at keeping stock up, you risk pushing things down further.

You could go buy that stock and push the price back up, but then you’re just giving those weak hands a premium return on their panic. Whereas if you wait a day or two, maybe you get a better price and can really buy in with vigour.

Or you could do nothing at all. You could let the fire burn to promote regrowth down the line.

Veritas doesn’t need to raise money any time soon, and insiders are all escrowed and in there for the long term. They’re looking to build a billion dollar exit, not a few percentage points to keep yours and my portfolio screens green for a day. So if the stock price drops… oh well?

It just seems counter intuitive, but it makes sense.

“Basically, yeah,” my contact said. “We’ll definitely buy it at these levels, but maybe tomorrow we can buy more. Maybe we just need to let the guys with no heart leave the game. I hope it doesn’t go down further, and believe it will be back to where it was soon, with news coming in time and lots of milestones being hit.”

“But I don’t want to catch a falling knife,” he added. “That’s a game for suckers and pumpers.”

As a shareholder, we often look at our screens and think, ‘what happened to this stock today? It dropped 10% on a single trade? Why didn’t someone come in and buy before close to cinch it back up?’

But why? What’s the point of temporary price boosts?

There’s an event in cycling called the Points Race, where you get a point for every lap that you’re leading as you cross the finish line, with the idea being to accrue the most points over the course of the whole race, rather than just leading at the end.

But the markets don’t reward you for your stock being up today, unless you’re selling today.

The VRT folks are right. It might not seem like it emotionally, where we all hope the people behind the companies we invest in will kill a brother for an extra half cent by close, but reality says, sometimes you just have to let the raft float down river for a while, rather than kill yourself trying to go against the current.

I own stock in Veritas, and I’m not happy seeing it where it is. But it didn’t get there on bad news or managerial bungling or a dumb business plan. It started with one big block being sold at market, and continued with chicken little sellers thinking it was the start of something terrible, which becomes self fulfilling over time.

Golden Leaf (GLH.C) had the same issue this year, mixed in with some bad financing timing and a lack of shareholder communication. It can really hurt a good company when circumstances outside their control begin to impact on the everyday.

But that’s life. You only lose money if you lock in those losses by selling…

At least that’s what I tell myself.

–Chris Parry

http://www.twitter.com/chrisparry

ADDENDUM: After a small additional drop the day after this piece was posted, VRT jumped 30% Tuesday on light trading. Nuff said.

Leave a Reply

1 Comment on "Sink or bail water? The falling knife conundrum from the company side"

Notify of
avatar

Sort by:   newest | oldest | most voted
Craig Amos
Admin
4 months 9 days ago

Sometimes weak hands need to be shaken out. Better for longer-term holders, IMO.

wpDiscuz