In the wake of COMPASS Pathways plc's (NASDAQ:CMPS) latest US$43m market cap drop, institutional owners may be forced to take severe actions

Key Insights

• Significantly high institutional ownership implies COMPASS Pathways' stock price is sensitive to their trading actions
• The top 9 shareholders own 52% of the company
• 15% of COMPASS Pathways is held by insiders

Every investor in COMPASS Pathways plc (NASDAQ:CMPS) should be aware of the most powerful shareholder groups. And the group that holds the biggest piece of the pie are institutions with 30% ownership. In other words, the group stands to gain the most (or lose the most) from their investment into the company.

As a result, institutional investors endured the highest losses last week after market cap fell by US$43m. This set of investors may especially be concerned about the current loss, which adds to a one-year loss of 32% for shareholders. Also referred to as "smart money", institutions have a lot of sway over how a stock's price moves. As a result, if the downtrend continues, institutions may face pressures to sell COMPASS Pathways, which might have negative implications on individual investors.

In the chart below, we zoom in on the different ownership groups of COMPASS Pathways.

Check out our latest analysis for COMPASS Pathways

What Does The Institutional Ownership Tell Us About COMPASS Pathways?

Institutions typically measure themselves against a benchmark when reporting to their own investors, so they often become more enthusiastic about a stock once it's included in a major index. We would expect most companies to have some institutions on the register, especially if they are growing.

We can see that COMPASS Pathways does have institutional investors; and they hold a good portion of the company's stock. This can indicate that the company has a certain degree of credibility in the investment community. However, it is best to be wary of relying on the supposed validation that comes with institutional investors. They too, get it wrong sometimes. It is not uncommon to see a big share price drop if two large institutional investors try to sell out of a stock at the same time. So it is worth checking the past earnings trajectory of COMPASS Pathways, (below). Of course, keep in mind that there are other factors to consider, too.

Our data indicates that hedge funds own 13% of COMPASS Pathways. That's interesting, because hedge funds can be quite active and activist. Many look for medium term catalysts that will drive the share price higher. George Goldsmith is currently the largest shareholder, with 11% of shares outstanding. Meanwhile, the second and third largest shareholders, hold 10% and 7.9%, of the shares outstanding, respectively.

On further inspection, we found that more than half the company's shares are owned by the top 9 shareholders, suggesting that the interests of the larger shareholders are balanced out to an extent by the smaller ones.

While studying institutional ownership for a company can add value to your research, it is also a good practice to research analyst recommendations to get a deeper understand of a stock's expected performance. There are a reasonable number of analysts covering the stock, so it might be useful to find out their aggregate view on the future.

Insider Ownership Of COMPASS Pathways

The definition of an insider can differ slightly between different countries, but members of the board of directors always count. Company management run the business, but the CEO will answer to the board, even if he or she is a member of it.

I generally consider insider ownership to be a good thing. However, on some occasions it makes it more difficult for other shareholders to hold the board accountable for decisions.

Our most recent data indicates that insiders own a reasonable proportion of COMPASS Pathways plc. Insiders own US$46m worth of shares in the US$302m company. This may suggest that the founders still own a lot of shares. You can click here to see if they have been buying or selling.

General Public Ownership

The general public, who are usually individual investors, hold a 25% stake in COMPASS Pathways. While this group can't necessarily call the shots, it can certainly have a real influence on how the company is run.

Private Equity Ownership

Private equity firms hold a 5.6% stake in COMPASS Pathways. This suggests they can be influential in key policy decisions. Some investors might be encouraged by this, since private equity are sometimes able to encourage strategies that help the market see the value in the company. Alternatively, those holders might be exiting the investment after taking it public.

Public Company Ownership

It appears to us that public companies own 10% of COMPASS Pathways. This may be a strategic interest and the two companies may have related business interests. It could be that they have de-merged. This holding is probably worth investigating further.

Next Steps:

I find it very interesting to look at who exactly owns a company. But to truly gain insight, we need to consider other information, too. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with COMPASS Pathways (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

If you would prefer discover what analysts are predicting in terms of future growth, do not miss this free report on analyst forecasts.

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.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.