An almost stubborn and misplaced faith in his own company’s share price
EXCESSIVE TRADING in a company’s listed shares, especially by its CEO or main shareholders, could be a danger signal that investors should take careful note of. If, in addition, the transactions are largely done in single stock futures (SSFs), an instrument created by Safex, the warning lights should flicker even brighter.
The large number of transactions in SSFs of Peregrine Holdings shares by executive chairman Seal Melnick during the past 18 months is a good example. Incidentally, Peregrine cautioned last week that its headline earnings for the year to 31 March 2009 could be as much as 87% lower than in the previous financial year.
Excessive trading in SSFs by the CEO of a company, especially one in the financial sector, is a serious warning to investors and clients of the company.
It doesn’t matter whether the directors are buying or selling shares. In the case of Peregrine, Melnick was consistently a net buyer of the company’s shares. And this was while the share price was falling from around R20 to below R5, before it recovered recently to the current R6/share. In fact, directors are, in general, pretty naïve about the price of their companies’ shares on the JSE. They always believe that their shares are priced too low, that the market is wrong and that there’s a wonderful opportunity to buy the shares and make a quick buck. The SSF, which sometimes requires an initial deposit of as little as 10%, misleads the owner/directors even more. The lesson for investors is clear: don’t follow greedy directors who stubbornly believe the price of their shares is too low.
In the case of Peregrine, an asset manager or wealth creator of about R40bn, which describes its objectives on its website by saying “The Peregrine Group is a leading provider of wealth and alternative asset management solutions”, the trading in its own shares by Melnick over the past year demonstrates an almost stubborn and misplaced faith in his own company’s share price. That’s a dangerous affliction among asset managers, especially when they are managing other people’s money. Clients of Peregrine and its subsidiary Citadel would be well advised to study Melnick’s transactions as set out in the graph and to allocate points for asset-management and timing skills.
Finweek tracked down the following transactions by Melnick through the JSE’s Sens announcements. These aren’t all his transactions, because some of the SSFs have rolled over from 2007 and because the position was only closed in March this year. Follow the transactions on the graph to understand them better. Each SSF is equal to 100 ordinary shares.
Other investors in Peregrine shares, as well as individuals and institutions that use Peregrine/Citadel’s financial services, may rightly wonder why it was necessary for the executive chairman to do all these transactions in Peregrine shares. The purpose was certainly to create wealth for himself – and not necessarily for other shareholders or for clients.
Peregrine also cautioned on Sens on 5 September last year that someone under the guidance of chairman Sean Melnick was apparently keen to make an offer for Peregrine’s total issued capital. This cautionary was repeated in October and November. In January this year, the company announced that executive chairman Sean Melnick was no longer interested in making an offer to the other shareholders. This caused the share price to fall further to 450c, before it recovered recently to the current 650c-700c.
Peregrine has just warned in a trading update that its profit for the year to 31 March 2009 could be as much as 87% down on the 225c/share earned in the previous financial year.
During this whole period of falling profit, the executive chairman clung stubbornly to a misplaced long position in SSFs on the company’s shares.
According to the trading update, Peregrine’s profit for the 2009 financial year could be somewhere around 30c-35c/share. The shares of the country’s leading banks are currently trading at earnings multiples of between six and eight. Expected dividend yields are fluctuating between 5% and 6,5%/year.
Peregrine will probably not – and in any case should not – declare any dividend for the financial year to 31 March 2009 out of its substantially lower profit. Last year, it still declared a final dividend of 56c.
At the current price of 650c-700c, Peregrine’s shares look expensive. After all, that’s a historical earnings multiple of 20, without any dividend, which is expensive, compared to other financial services providers and even our large banks.
Speculation with SSF could cost him R100m. Sean Melnick