Markets love a risk-taker, particularly a successful one. Founders who maintain big stakes in their companies give comfort to those who might not care to risk so much. The moment those entrepreneurs dare to cash in on their holdings, investors start fretting.
Steve Morgan, chairman of UK housebuilder Redrow, caused eyebrows to arch this week by announcing the sale of nearly a fifth of his shares, and those of his related charitable trust. That knocked 8 per cent off the price of the company he started in 1974 and caused other housebuilders to wobble.
Worry less about any bearish signals from Mr Morgan, who came out of retirement to lead Redrow after the financial crisis. Instead query why the valuation of the company remains so doggedly low.
The notion that insider trading reflects something good or bad about a company is a long-held truism. Various studies in the US and UK back up the hunch. Research done at University of Exeter’s Business School in 2009 revealed better performance following purchases and vice versa after sales.
However, if Mr Morgan senses something is wrong it is not obvious what that problem could be. Last week the builder reported good full-year results, with a record order backlog. His sale only reduces the value of his personal holding back down to the level of two months ago. No big deal.
What should concern the market more is the fact that despite all the good news over the past year, Redrow still trades cheaply. Yes, its price to forward earnings valuation has come up from the lows that followed the Brexit vote. Yet with business likely to remain brisk for at least another year, a multiple below 8 times, under its five year average, stands out. That is true for all FTSE-listed housebuilders.
Whether they are housebuilders or automakers, cyclical companies trading cheaply on record earnings should warrant caution. Even so, ask not why Mr Morgan sells. Wonder instead why the market does not bid up his company’s shares.
Do you want to receive Lex in your inbox? Sign up for the weekly Best of Lex email at ft.com/newsletters.