Transaction Capital

What lessons can we learn from the collapse in share price of Transaction Capital?

Transaction Capital has been making headlines in the past week but unfortunately for all the wrong reasons. The company saw a colossal crash in share price in the matter of days and the stock is currently down over 65% in the past month alone. Fortunately this was not a company I had held in my portfolio so I was unaffected by the drop in price however many investors were not so lucky.

Looking back retrospectively I think there are some important takeaways that have stuck out to me that can be important lessons to many investors going forward. These are as follows:

The sale of shares by insiders can be a leading indicator of what is to come. In the case of Transaction Capital multiple directors and members of keys management had disposed of shares in December 2022 a mere few months before the crash in the share price. This can often be an indicator of what is to come as a director has intimate inside knowledge of a company and may look to unload shares if they believe the share price might come under pressure in future, especially if there is a results announcement coming. 

The importance of positioning sizing and diversification. If you have a highly concentrated portfolio of only a handful of stocks one mistake could completely wipe out your portfolio. Limit your unsystematic risk by diversifying across sectors, geographies and asset classes. I would recommend holding a maximum of 5% of your equity portfolio in a single stock. Anything more than this can cause dire consequences should something go wrong. 

Dont try to catch a falling knife. Many retail investors saw the share price drop 40% in one day and thought this was a great chance to buy the dip and make a quick profit. This however did not work out so well the share price proceeded to fall another 40% the day after and many who tried to make a quick profit are now down double digits.

Be cautious of companies with a high PE. When a stock trades at a high PE this implies that investors are anticipating the company to grow at a high rate in order to compensate for this high growth. However should the company not be able to deliver on this growth, things can come crashing down rather quickly as was the case with Transaction Capital. Transaction Capital had been trading a lofty 18 times earnings in November 2022 far above competitors implying that investors were expecting the company to grow at a rapid rate to justify this which it was unable to do so. Given that the macroeconomic headwinds the company faced it always seemed unlikely that it would be able to deliver this growth consistently.  

Markets can be irrational and emotional. Looking at the volatility in the price of Transaction Capital over the past few days is testament to the fact that markets can be overly emotional and investors sentiment can change in the matter of days.