I am going to take a deep dive into Erin Energy Corporation’s (AMEX:ERN) 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. Differences in ownership structure of companies can have a profound effect on how management’s incentives are aligned with shareholder returns, which is why we’ll take a moment to analyse XYZ’s shareholder registry. All data provided is as of the most recent financial year end.
With an institutional ownership of 30.27%, ERN can face volatile stock price movements if institutions execute block trades on the open market, more so, when there are relatively small amounts of shares available on the market to trade These moves, at least in the short-term, are generally observed in an institutional ownership mix comprising of active stock pickers, in particular levered hedge funds, which can cause large price swings. For ERN shareholders, the potential of this type of share price volatility shouldn’t be as concerning as hedge fund ownership is is not significant,indicating few chances of such sudden price moves. While that hardly seems concerning, I will explore further into ERN’s ownership type to find out how it can affect the company’s investment profile.
Insiders form another group of important ownership types as they manage the company’s operations and decide the best use of capital. Insider ownership has been linked to better alignment between management and shareholders. One of the major owners in ERN are individual insiders, sitting with a hefty 58.42% stake in the company. Broadly, insider ownership of this level has been found to negatively affect companies with consistently low PE ratio (underperforming). And a positive impact has been seen on companies with a high PE ratio (outperforming). It may be interesting to take a look at what company insiders have been doing with their holdings lately. Insiders buying company shares can be a positive indicator of future performance, but a selling decision can simply be driven by personal financial needs.
General Public Ownership
A substantial ownership of 10.63% in ERN is held by the general public. With this size of ownership, retail investors can collectively play a role in major company policies that affect shareholders returns, including executive remuneration and the appointment of directors. They can also exercise the power to decline an acquisition or merger that may not improve profitability.
Private Company Ownership
Another group of owners that a potential investor in ERN should consider are private companies, with a stake of 0.68%. While they invest more often due to strategic interests, an investment can also be driven by capital gains through share price appreciation. However, an ownership of this size may be relatively insignificant, meaning that these shareholders may not have the potential to influence ERN’s business strategy. Thus, investors not need to worry too much about the consequences of these holdings.
What this means for you:
Are you a shareholder? ERN’s considerably high level of institutional ownership calls for further analysis into its margin of safety. This is to avoid getting trapped in a sustained sell-off that is often observed in stocks with this level of institutional participation. Looking for ways to reinforce your current portfolio holdings? Take a look at our free platform for a list of stocks with a strong growth potential.
Are you a potential investor? Ownership structure should not be the only focus of your research when constructing an investment thesis around ERN. Instead, you should be evaluating fundamental factors like the relative valuation of ERN, which is an important driver that determines ERN’s share price. Take a look at our most recent infographic report on ERN for a more in-depth analysis of these factors to help you make a more well-informed investment decision.
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.