As an investor in a company which announces a secondary stock offering, what should I do – sell or hold? Case in point – I hold 150 shares of TARO which announced a secondary stock offering at market close last night. The stock closed at 95, but today quickly dropped to the mid 80s. I know that when a secondary is offered it dilutes the share price of each share, but in the long run is this a negative for the company? TARO was my best performing stock until this happened, and I am unsure now if I should continue to hold or sell my shares.
This is one of the things that companies are doing more of lately, particularly those whose stock price is performing well. It is a way cash hungry companies can get some funds when there is not a lot of investment going on in the economy. It is always a quandary when an otherwise well-behaved stock gets this kind of news. It comes in different forms, such as ‘valuation’ downgrades by analysts.
Strong stocks tend to overcome this type of news. We had the same problem with BBY back in May. The stock was on a good move, was in a great pattern, and was one of those that we felt was going to lead in the recovering economy. Well, we bought in as it started to move higher after consolidating sideways for 4 sessions. Two sessions later it announces its own secondary offering, and it is down 4.95 the next session on heavy volume. Gapped down, no time to recover or sell as the news was out. What did we do? Cancelled the stop orders and waited to see what happened. The stock was in good shape; the initial sell off took it down close to the 50 day MVA. If it held there, we would give it time to recover. If not, we would get out. It did just that and continued its pattern higher. A strong stock recovered. If it had been shaky, the institutions would not have stepped up and bought in at the 50 day MVA.
Look at TARO today. It had made a very solid pre-split run and was consolidating for perhaps another spurt to the actual split effective tomorrow. Well, that is not going to happen. We know some stocks rally at the split while many sell off because of the additional float. TARO now has the split and the secondary offering to contend with. That could give added weight on the stock. On the other hand, look at the action today: it gapped lower and then sold down almost $9 intraday. Then it recovered and closed above the 18 day MVA. TARO is in our opinion a new leader and it has the numbers and performance to back it up. We think it has the strength to overcome this just as Best Buy did. We are going to see how it responds and look to use this to add some positions. At its split, if it can start to rally, we view that as a real positive and will look at new positions.
