The biggest faller in the FTSE 250 so far today (29 May) is IWG (LSE:IWG). The stock is down 7%, relating to some short-term negative news. However, the stock is still up 37% over the past year. When I look closer at the business, I think this could just be a dip. Here’s why.
Details of the move
The news that’s causing the stock to dip sharply relates to the CEO, Mark Dixon. He sold 35m shares in the business, generating tens of millions of pounds in the process. The funds are to be used towards paying off pledge and lending contacts with one of his banking providers.
Naturally, when the CEO sells such a large chunk of stock in one go, the share price is going to fall. This isn’t just related to the transaction, but rather by other investors seeing this and choosing to sell too. The thinking here could be that if the CEO is selling, does he know something that we don’t?
The actions of Dixon are also watched closely because he’s the largest shareholder by some way. Before the sale today, he owned 25% of the outstanding shares, almost 255m. That’s quite unusual to have a CEO with such a large stake in a business this big. However, investors need to remember that he is also the founder.
Why I’m not concerned
I believe this is just a dip based on a few reasons. Dixon had 255m shares. He’s sold 35m, which sounds like a lot, but based on his overall holding it’s not a huge amount. It’s not like he has sold all of his stake in the business.
Dixon has a tangible reason for selling, based on a separate need for cash. There’s nowhere where it says he sold the stock because he thought the share price was overvalued. Put another way, this was a trade not for speculative purposes, but for a transactional need.
Finally, when I consider the trajectory the firm is on, I struggle to see this fall today manifesting a much larger drop in coming months. The full-year results from 2023 started off by noting the firm had “delivered the highest-ever revenue in IWG’s 35-year history”.
The 10% jump from 2022 help to fuel strong cash flow and ultimately a 34% increase in EBITDA from the previous year.
Watch out for the losses
There’s always a reason to be cautious. In this case, I am concerned that the business is still posting a loss after tax. This has been the way since the pandemic hit in 2020. It’s true that the hybrid workspace setup has changed a lot since then. I’d argue that IWG is well-placed to deal with this pivot in the long run. Yet it could still take several years before the business gets back to making a profit.
The risk is that this doesn’t happen. Investors can quickly get scared on realising this.
Despite this, I think the reaction today has been overblown. On that basis, I’m thinking about buying the stock shortly, looking for a move back higher in coming months.
