Senior executives at Aconex Ltd (ASX: ACX) have been selling off their holdings in recent weeks, exciting the short-sellers, whose interest in the company is at an all-time high. As a result of market concerns, shares in Aconex have declined from above $8 to today's prices of $4.80.
Short sellers effectively bet that a company's price will fall, so that they can profit from the decline. They've had a number of coups in recent years, with Flight Centre Travel Group Ltd (ASX: FLT), Slater & Gordon Limited (ASX: SGH), and Myer Holdings Ltd (ASX: MYR) all notable fallers.
As of the most recent data at 17 November, short interest in Aconex was just over 12%. This is up from 8% in October, and 4.5% in September, where we first commented on the insider sales. An article in Fairfax media earlier this week suggested the increase in short selling was due to management's sales as well as the subsequent departure of the Chief Financial Officer (CFO), Stephen Recht.
Probably the most accurate explanation is that there's likely also concern over the company's valuation in terms of its earnings. Aconex has guided for between $22 million and $25 million of Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA), excluding acquisition costs, for 2017.
Even if that were pure profit, and it's not, it would value the company at a lofty 40x its full-year earnings. While that's not egregious in itself – A2 Milk Company Ltd (Australia) (ASX: A2M) commands a similar valuation – the insider sales and CFO departure haven't filled investors with confidence.
Foolish takeaway
As Foolish contributors have written before, company insiders deserve to be rewarded for their efforts. If they want to take some money off the table after the IPO and diversify into other companies – or Ferraris – good for them.
However, there is a big grey area between where share sales are, and are not, a concern. Insider departures usually fall on the 'bad' side of that line. Maybe there's nothing to worry about, but I have some yellow warning lights flashing in the 'Aconex' part of my brain. Another insider departure or more acquisitions to generate growth would be major red flags in my opinion.
