In theory, a secondary offering shouldn’t impact the price of company’s stock — any dilution is offset by an increase in a company’s cash balance, and eventually offset by the addition of a revenue-bearing asset.
In reality, however … well, secondary offerings rank right up there with FDA decisions and crucial court cases when it comes to creating trade-worthy volatility.
The question is: Should you play with this fire?
A Secondary What?
A secondary offering is, in simplest terms, a way for a company that’s already publicly traded to raise additional capital by issuing more shares (as opposed to an initial public offering, or IPO, which is the issuance of a company’s first publicly traded shares).
The purposes of a secondary offering are nearly unlimited. A small biotech might make an offering to continue development of a key drug. A mining company might raise funds to acquire additional earth-moving equipment to increase production. JCPenney (JCP) is about to raise capital in the secondary market for “general corporate purposes,” while a little generic drug company called Lannett (LCI) recently did it because its stock had advanced some 340% this year so far, and at its lofty price the company would simply be able to garner a lot of cash for the future without giving too much of itself away.
Make no mistake, though — sooner or later, any company is going to do something with its idle money. The value of a secondary offering ultimately depends on what it’s going to do with that loot, and how much fruit that venture might bear.
Stocks Worth Investing In
There’s a common element among all the investment-worthy names raising post-IPO money by issuing more stock … the upside of that investment is clear, and plausible.
Take First Solar (FSLR) as an example. The long-beleaguered solar panel-maker gathered more than $400 million in June via the sale of newly issued shares. Although the funds were simply earmarked for general purposes, the odds are good — and not exactly veiled — that First Solar is looking to make acquisitions with the cash, and specifically looking to garner in-development power system projects.
But isn’t solar power a losing battle, riddled with too much competition and not enough demand?
Nope. That previously was the case, but it’s not anymore. Bloomberg New Energy Finance believes the capacity of new photovoltaic installations could exceed that of newly installed wind-power capacity this year, for the first time ever. And with PV prices still falling and PV efficiency still improving, solar power is closer than ever to cost-competitiveness with more traditional forms of power production like coal and nuclear. Industry forecaster IHS Inc. expects a solar installation growth rate of 18% for 2014, following a 20% expansion this year.
Point being, First Solar can actually do something constructive with that money.
The Chefs’ Warehouse (CHEF) is another company that recently announced a secondary offering, and like First Solar, has proven it can actually do something productive with the money.