American Public Education

It would be nice to write about a different topic!

Once again, we avoid the instinctive “Type 1 – fight or flight”1   response and we choose not to panic.

American Public Education, Inc. released its results and conference call transcript prior to market open. We reviewed them and they (subjectively) did not appear reassuring. However our investment process seeks to only hold businesses when (objectively) reasonably cheap, so we expect “bad news” to already be somewhat factored into the price. Well on first impressions we were wrong in this case – as the share price fell 26%.

Once again we cannot make sense of the market’s reaction. It seems that one or more shareholders took the view they just had to exit the stock without regard to price. And the fact that it is a small company (market capitalisation of around USD300m) with relatively low levels of liquidity appears to have exacerbated the price decline. The question is whether this is rational.

We started composing this blog the day the shares plunged. When we completed this synopsis (three trading days later) the share price had rebounded by more than 50% to a price materially higher than prior to the release of its results. Some of that recovery may be attributed to the “Trump” effect (two other companies in the same field were up around 20% over those two days – we’ll take any luck if we can get it!). However, we suspect the vast majority of the extraordinary rebound was due to other investors simply recognising an over-reaction to a less than ideal set of quarterly results and business update.

The selling on that day could not possibly been based on a complete analysis of the results as not all up to date financial information was provided (for example, the updated balance sheet was not available). So, whilst we knew at the time that these results may well cause us to revisit the position, our trade decisions are always based on our investment process, checklists, and rules and these require full and current financial information.

This experience once again serves to test our emotional resolve and illustrates how our investment process is designed to operate in the context of “Mr Market’s” more depressed days.

Stay rational,
Stuart and Alexis

1 The fight-or-flight response (also called hyperarousal, or the acute stress response) is a physiological reaction that occurs in response to a perceived harmful event, attack, or threat to survival.” Bodily changes in pain, hunger, fear, and rage. Walter Bradford Cannon (1929). Wikipedia.

This article has been prepared solely for the purpose of providing general information about Alluvium Asset Management Pty Ltd (ABN 69 143 914 930) which holds an Australian Financial Services Licence Number 476067 (“Alluvium”), and the Alluvium Global Fund, which is managed by Alluvium. The article has been compiled in good faith in relation to the activities of Alluvium. Alluvium believes the statements contained are reliable, however no representation is made as to the completeness or accuracy of the information it contains. In particular, you should be aware that this information may be incomplete, may contain errors or may have become out of date. Use of this article is entirely at your sole risk. Reproduction or distribution of this article without written permission is prohibited. The information is general in nature and does not take into account your personal circumstances, financial needs or objectives. Statements contained are not general advice or personal advice and should not be considered as a recommendation in relation to an investment in the Fund or any company referred to, or that an investment in the Fund or any company named in the article is a suitable investment for any specific person. Further, it is likely that at the time this article is published, Alluvium’s and/or the Fund’s position or opinion in any identified company may well be different to that at the time of writing. You should seek independent financial advice and read the relevant disclosure document prior to acquiring a financial product. Alluvium, its directors and employees do not accept any liability for the results of any actions taken or not taken on the basis of information contained in this article, or for any negligent misstatements, errors or omissions.