The WiseTech Global Limited (ASX: WTC) share price has taken a tumble since completing its $300 million institutional share placement. Here’s why I decided to sell…
About WiseTech
WiseTech Global was founded in 1994 by Richard White to provide software to the logistics sector. Since then it has grown to become a global provider of logistics software, claiming to service 19 of the top 20 logistics companies globally.
WiseTech makes money by charging its customers on a ‘per use’ basis rather than as a standard subscription model. Meaning, WiseTech directly benefits as its customers grow their businesses.
Share Purchase Plan (SPP)
WiseTech recently raised $300 million through an institutional share placement and $35.9 million through a share purchase plan, completed on 15th April 2019. Over the last month, the share price is down more than 8.2%.
The reason I sold is that I think the shares were overvalued – I also think I bought at the wrong price but that’s another story.
See, when a company offers a share purchase plan, it often signals to the market that the company thinks its shares are fairly valued or overvalued, and on average the share price will drop after such an announcement.
This is consistent with Myers and Majluf’s 1984 signalling theory.
Their theory states:
“Because a company concerned about protecting its existing shareholders will tend to sell only at a price that correctly values or overvalues the firm, investors infer from the decision to sell that the company is likely to be overvalued and the price drops with the announcement of the SEO”.
I was already of the opinion that shares were overvalued and caught up in the hype, much like Appen Limited (ASX: APX) or Altium Limited (ASX: ALU), but the share purchase plan confirmed this, and I decided to sell.
There are other disadvantages to share purchase plans as well, such as share dilution, but this was the main reason.
What Will I Buy Now?
I’m still looking for the next ASX company to buy shares in and there are a few on my radar, but nothing has been decided yet. If you’re looking for proven ASX shares that may provide good value today, check out the companies in the free investing report below.
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Disclaimer: At the time of writing, Max does not own shares in any of the companies mentioned.
