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Is this why Reject Shop Ltd’s shares were crushed last week?

November was a shocking time to be a Reject Shop Ltd (ASX: TRS) shareholder.

While the year in general has been far from stellar, shares in the discount retailer slipped another 17% in the last three trading days on what looks to have been massive selling pressure.

I speculated on possible causes early Friday morning, and recent developments have seen me proven both right, and wrong.

That article stated that the sale of shareholdings by large funds was the most likely cause given the departure of The Reject Shop from the ASX300 and an upcoming market rebalance.

However I simultaneously argued that the comparatively high number of trades made large sales seem unlikely.

Here’s what I got right:

In a response to an ASX price query just after lunchtime, The Reject Shop management informed the market that:

  • No, The Reject Shop is not aware of any information concerning it that, if known by some in the market, could explain the recent trading in its securities.
  • The Reject Shop has no other information regarding the trading of its securities, except for the removal of TRS from the Morgan Stanley Capital International (MSCI) Global Small Cap Index on Tuesday 25 November.
  • Reject Shop is in compliance with the Listing Rules, and in particular, Listing Rule 3.1 (rule of immediate disclosure of price-sensitive information)

Removing the company from the MSCI most likely required the index managers to sell their entire shareholding and replace it with the latest entrant in the Index, which could explain the selling pressure.

Now, here’s what I got wrong:

I spent the better part of 30 minutes collecting trade data on the Reject Shop’s securities on Friday afternoon.

Despite a similar ratio of total trades/volume to previous days, closer analysis found that trades were split either into very large or very small parcels, making my use of the average parcel figure in Friday’s article quite misleading.

Between 2:12 and 2:29pm on Friday, 148 trades in Reject Shop were executed for a total of 97,678 shares traded. This works out to an average parcel size of 660 shares per sale.

However, the 38 biggest trades or 25.6% of the total number of trades, actually accounted for 82,427 volume or 84.3% of the shares traded in this time.

If I sharpen the analysis to only include trades of 1,000 shares or larger, we find that the 25 trades of this size – 16.8% of all trades – accounted for 75,349 volume or 77.1% of shares traded.

As you can see, quite a small number of trades accounted for a majority of the total shares sold, which could indicate large holdings being sold.

There are obvious risks with extrapolating these findings to a whole day and to earlier days of losses last week.

Based on the data I collected however, it does seem most likely that selling pressure from major shareholders is behind Reject Shop’s fall last week.

The important thing to take away is that the Reject Shop isn’t being sold down because of adverse market announcements or because it’s suddenly a bad investment; it’s being sold because it’s no longer part of an index.

Since companies generally leave an index because their shares fall and make a company’s market cap too low to be part of that index any longer, you could effectively say that the Reject Shop’s shares are being sold because its shares have been sold.

Silly logic, and the new ultra-low price looks like an appealing entry point for investors who have had the company on their watch-list a while.

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Motley Fool contributor Sean O'Neill owns shares in Reject Shop Ltd.

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