Insider Transactions and Market Inefficiencies

| About: Orsus Xelent (ORSX)

There are many reasons why a particular stock's price might differ from its value, not the least of which is a motivated seller. A motivated seller will drop the price of any asset (e.g. real-estate, vehicles etc.) and stocks are no exception - particularly small-caps, where a lack of liquidity can result in dramatic price drops.

Consider Orsus Xelent (ORS), a stock we have previously discussed as a potential value play. The former CEO and a former director of the company owned about 30% of the outstanding shares of this company just a few months ago; but in the last several months, they have started to unload their shares.

Former director Wang Zhibin has unloaded some 6 million shares between April and September alone, representing 20% of the company's outstanding shares. Over the course of that period, that represents almost 40% of the company's trading volume (though many of the transactions took place off-market). Similarly, since Wang Xin resigned as CEO in March, he has been unloading his 3 million shares at a frantic pace. Compare his daily market transactions to Orsus' average daily trading volume; he has clearly had a large effect on the stock price.

Do these sellers know something we don't? It's entirely possible. But at the current stock price, a lot would have to go wrong for the investor to lose his principal. It's also important to remember that these are not insiders - they began to liquidate their stock only after they left their posts. As such, it's entirely possible they are selling their shares for personal reasons, or because they can no longer influence the company.

Many financial experts regard stock prices as fully reflecting the values of the underlying businesses. This assertion must be thrown in doubt, however, in cases such as this one, where shareholders controlling large blocks of shares are dumping their stock over very short periods of time.

Disclosure: Author has a long position in shares of ORS