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Should You Be Concerned About Appliance Recycling Centers of America Inc’s (ARCI) Shareholders?

I am going to take a deep dive into Appliance Recycling Centers of America Inc’s (NASDAQ:ARCI) most recent ownership structure, not a frequent subject of discussion among individual investors. Ownership structure has been found to have an impact on shareholder returns in both short- and long-term. Since the same amount of capital coming from an activist institution and a passive mutual fund has different implications on corporate governance, it is a useful exercise to deconstruct ARCI’s shareholder registry. All data provided is as of the most recent financial year end.

View our latest analysis for Appliance Recycling Centers of America

NasdaqCM:ARCI Ownership Summary Nov 23rd 17
NasdaqCM:ARCI Ownership Summary Nov 23rd 17

Institutional Ownership

ARCI’s 17.71% institutional ownership seems enough to cause large share price movements in the case of significant share sell-off or acquisitions by institutions, particularly when there is a low level of public shares available on the market to trade. Although ARCI has a high institutional ownership, such stock moves, in the short-term, are more commonly linked to a particular type of active institutional investors – hedge funds. Considering hedge funds hold a stake of 6.39% in the company, ARCI shares may experience high short-term volatility as this class of institutions are frequently found to sell significantly during market-wide shocks. I am going to further examine ARCI’s ownership structure to check how other major shareholders can affect its investment case.

Insider Ownership

I find insiders are another important group of stakeholders, who are directly involved in making key decisions related to the use of capital. In essence, insider ownership is more about the alignment of shareholders’ interests with the management. 9.05% ownership makes insiders an important shareholder group. An insider stake of this level indicates that executives are highly aligned with the shareholders as both stand to gain when the value of the company rises. However, it would be interesting to take a look at their buying and selling activities lately. Buying may be sign of upbeat future expectations, but selling doesn’t necessarily mean the opposite as the insiders may be motivated by financial needs or they are simply diversifying their risk.

NasdaqCM:ARCI Insider Trading Nov 23rd 17
NasdaqCM:ARCI Insider Trading Nov 23rd 17

General Public Ownership

The general public holds a substantial 58.29% stake in ARCI, making it a highly popular stock among retail investors. This size of ownership gives retail investors collective power in deciding on major policy decisions such as executive compensation, appointment of directors and acquisitions of businesses. This level of ownership gives retail investors the power to sway key policy decisions such as board composition, executive compensation, and potential acquisitions. This is a positive sign for an investor who wants to be involved in key decision-making of the company.

Private Equity Ownership

With a stake of 8.55%, private equity firms form another important class of owners in ARCI. With a stake of 8.55%, they can influence ARCI’s key policy decisions. This is a positive sign for potential investors as these firms play an important role in aligning company policy with shareholder returns.

What this means for you:

With significant institutional ownership, including active hedge, existing investors should seek a margin of safety when investing in ARCI. This may enable shareholders to comfortably invest in the company and avoid getting trapped in a sustained sell-off that is often observed in stocks with this level of institutional participation. However, ownership structure should not be the only focus of your research when constructing an investment thesis around ARCI. Instead, you should be evaluating company-specific factors such as the intrinsic valuation, which is a key driver of Appliance Recycling Centers of America’s share price. I urge you to complete your research by taking a look at the following:

NB: Figures in this article are calculated using data from the last twelve months, which refer to the 12-month period ending on the last date of the month the financial statement is dated. This may not be consistent with full year annual report figures.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.

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