After a sharp decline in profit back in August, it looked as though the worst might finally have been over for shareholders in Reject Shop Ltd (ASX: TRS), with the company having already lost 48% of its value.
Subsequent months have shown that's not the case, with Reject Shop falling an extra 17% to $7.50 thanks to a negative pre-AGM trading update.
The past few days have likely left shareholders reeling, with the company falling another 17% to lows of $6.50 in trading today.
What's going on?
The simple answer is 'I don't know'; I put my head together with two other Foolish contributors, and they don't know either.
With no recent market updates, no director dealings, no major shareholders selling out, and no recent negative media reports, it's all a bit of a mystery.
Generally speaking you could expect any major sell-outs to occur soon after negative updates; the most recent of which was the pre-AGM trading update on 15 October.
Even if a few large shareholders were being clever and selling their holdings piecemeal to preserve the price they receive for their shares, they've had plenty of time to do so – and obviously the major fall in price seems to discount this theory.
So I think we can safely say the sale has not been directly sparked by market updates.
This leaves several possibilities.
The most likely one may be sales of large shareholdings.
It's also possible that ASX funds are selling their holdings, since Reject Shop is no longer a member of the ASX300 and there is an ASX rebalancing coming up in early December. This may have led to an initial fall or a 'ripple effect' which was picked up and carried down by automated or human traders.
However as I'll explain below, I don't think large sales are solely to blame.
Finally it may also represent some form of trading on non-public information. That's unlikely, based on the risk of detection and Reject Shop's continuous disclosure obligations, but technically possible.
Now, let's look at some data.
Average daily volume for Reject Shop seems to float between 100,000 and 200,000 shares a day, all the way back to July and beyond. There were big spikes in volume on 19 September (880,000) and 15 October (500,000), although these didn't cause major price changes.
Thanks to an idea from Owen Raskiewicz, I checked out the trade data for the past few days:
As readers can see, there were 1,814 trades on November 25, accounting for 918,133 shares; Reject Shop closed ~$0.50 lower. That is an average parcel of 506 shares per trade. It is still entirely possible (even likely) that a few large shareholders are selling, but the sheer number of trades seems to rule out major fund activity.
Very little happened on November 26, with Reject Shop closing down 8 cents on volume of 173,400 and 1,087 trades.
On November 27, 863,282 shares were traded over the course of 1,951 transactions, for an average parcel of 442 shares. This sent shares down $0.80. Again, the sheer number of trades seem to rule out fund activity.
However major shareholders could be reducing their stake without selling out – the future release of changes in significant holdings forms to the market may tell the story there.
In summary, while we know a little more about what's going on, we still have no indication of why.
And in fact, asking why other people are selling is the wrong question.
Investors should really be asking themselves, do I still want to own this company? A company's share price has very little correlation to its actual business performance in the short term – especially over a three-day period without any market updates.
If you do want to own shares in the Reject Shop, today's prices could prove to be quite the bargain.
