The power of market signalling

The JSE requires companies to make certain disclosures. These range from reporting results through to alerting the market when directors and their associates buy or sell shares.

There is also a need to disclose any resignations of directors. This year, there has been another interesting development: an allowance by the JSE for companies to defer the release of financial results.

This creates an ecosystem of regular newsflow that keeps investors and analysts busy. Under the newsflow umbrella, we find specific announcements that could be considered “signalling” by companies.

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What moves a share price?

There are various things that cause a share price to move, including:

  • General market sentiment
  • Industry-specific data released (e.g. by StatsSA)
  • Release of results by a competitor
  • Specific company announcements

This is because traders and investors typically wait for a specific catalyst to kick them into action on a stock. There is a general feel for the stock in the market, but short-term volatility is always based on catalysts.

Company announcements have a signalling effect to the market. There is no greater signal than a purchase of shares by “corporate insiders” like the executive management team.

Massmart on a charge

CEO Mitchell Slape took R8m of his own money and used it to buy shares in Massmart. That sends a very strong signal to the market that the shares are undervalued, because why would any CEO put his or her own money into a stock that is overvalued?

Nobody knows the realities facing Massmart better than Mitchell Slape. I’ve been bullish on a Massmart turnaround for a while now and I am thrilled with how the share price has performed in the past couple of weeks.

The share price is up 60% in the past month.

Isn’t this insider trading?

This is a complex topic. The short answer is no.

Companies have “closed periods” where directors and their associates are not allowed to trade their shares. This is a JSE rule. Companies normally extend this to prohibit all employees from trading shares over this period, just to play it safe.

The closed period kicks in from the end of the company’s reporting period until the results are formally released. This prevents a situation where “corporate insiders” would be able to trade with the benefit of far more information than the general market.

Now, it is obvious that the management team will always have the full story vs. the market, but it also makes no sense to ban executives from investing in their own company. So, the closed period is an attempt to level the playing field in a practical way.

Insider trading, on the other hand, is trading on the basis of specific or precise information, which has not been made public and which is obtained or learned as an insider and would have a material effect on the price of the listed shares.

A great example of insider trading would be the CEO telling his golfing buddies that there is a buyout offer coming next month at a specific price. Provided this isn’t public knowledge, the golfing crew are now at a huge advantage. They can buy the shares and wait for the offer, making a significant profit based on specific information which was not public and which would materially affect the share price if it was public.

Insider trading is a criminal offence. It isn’t the same as market signalling and it’s useful to understand the difference.

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