Monday, January 17, 2005
No medicine cabinet cure for an overhang
Recent stock-market announcements concerning my third largest holding, Chaucer, have revealed the probable reason for the share's lack of progress in recent months.
When an organisation or individual owns in excess of 3% of a company, that shareholding is deemed notifiable and a formal announcement to the stock exchange is required. As that shareholding grows or is trimmed across whole percentage fractions above 3%, another news item is generated. On 17th November, Chaucer announced Rostrum Parnerships shareholding at 4.94%. Rostrum is a fund manager investing in the Lloyd's sector and from yesterday's announcement that they now hold 3.76% of issued share capital, the company has clearly been selling down its large shareholding.
When Rostrum will stop selling we can't tell. The fund manager's intention may be to clear out their entire stake, or just cut it to a size comfortable with the rest of the portfolio. But this uncertainty, along with the accompanying selling volume may be the root cause of Chaucer's geriatric share price movement.
Such selling pressure looms like The Flying Dutchman over the shares and is a common ailment amongst small-caps. The market for tiddlers such as Chaucer is much less liquid than FTSE-100 companies - not only are the shares infrequently traded but many institutions flatly refuse to own any portion of a company this small. So, shares are trickled out into the market in large sells. Potential buyers are deterred by the assumption large sales are in the pipeline and any buying that may create a price rise is drowned with institutional stock dumping.
This situation is termed an overhang. The best strategy an investor can employ to invest through this selling pressure is patience. The overhang is secondary to the valuation question, it merely highlights friction and illiquidity in the market. In time, the overhang will clear. If the share remains cheap, buying pressure should gain control and the price exhibit some upward momentum.
But today's announcement from Aviva plc has raised my hopes this overhang will evaporate sooner rather than later. Aviva (through it's subsidiary Morley Fund Management) announced the recent purchase of 2.4m Chaucer shares, or 0.82% of the entire company, increasing their stake to 4.35%.
With luck, the overhang situation will be resolved before April's results from Chaucer. With the increased attention final results brings, the price of the shares in the market will hopefully begin to reflect their value rather than the any particular fund's decision to sell. And who knows, if Aviva are still accumulating stock, that overhang may just turn into an underhang.
The Artful Dodger
When an organisation or individual owns in excess of 3% of a company, that shareholding is deemed notifiable and a formal announcement to the stock exchange is required. As that shareholding grows or is trimmed across whole percentage fractions above 3%, another news item is generated. On 17th November, Chaucer announced Rostrum Parnerships shareholding at 4.94%. Rostrum is a fund manager investing in the Lloyd's sector and from yesterday's announcement that they now hold 3.76% of issued share capital, the company has clearly been selling down its large shareholding.
When Rostrum will stop selling we can't tell. The fund manager's intention may be to clear out their entire stake, or just cut it to a size comfortable with the rest of the portfolio. But this uncertainty, along with the accompanying selling volume may be the root cause of Chaucer's geriatric share price movement.
Such selling pressure looms like The Flying Dutchman over the shares and is a common ailment amongst small-caps. The market for tiddlers such as Chaucer is much less liquid than FTSE-100 companies - not only are the shares infrequently traded but many institutions flatly refuse to own any portion of a company this small. So, shares are trickled out into the market in large sells. Potential buyers are deterred by the assumption large sales are in the pipeline and any buying that may create a price rise is drowned with institutional stock dumping.
This situation is termed an overhang. The best strategy an investor can employ to invest through this selling pressure is patience. The overhang is secondary to the valuation question, it merely highlights friction and illiquidity in the market. In time, the overhang will clear. If the share remains cheap, buying pressure should gain control and the price exhibit some upward momentum.
But today's announcement from Aviva plc has raised my hopes this overhang will evaporate sooner rather than later. Aviva (through it's subsidiary Morley Fund Management) announced the recent purchase of 2.4m Chaucer shares, or 0.82% of the entire company, increasing their stake to 4.35%.
With luck, the overhang situation will be resolved before April's results from Chaucer. With the increased attention final results brings, the price of the shares in the market will hopefully begin to reflect their value rather than the any particular fund's decision to sell. And who knows, if Aviva are still accumulating stock, that overhang may just turn into an underhang.
The Artful Dodger
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