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Secondary Offerings: Friend or Foe?

The fundraising isn't what matters — it's the company holding out its hands

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The $500 million chef’s supply outfit might not be big enough to turn many heads, but the revenue growth rate for this young company has been an impressive — and impressively consistent — 20% for the past three years; earnings growth has been similarly strong.

Already proving it knows how to do well, empowering CHEF with another $75 million to expand the business (most likely through acquisitions) wasn’t a particularly big risk. The path to a solid rate of return on that cash is not only clear, but plausible.

Stocks Not Worth Investing In

Above all else, know that some (many) secondary offerings don’t benefit the company at all, but are instead brokered exits of a major shareholder’s position in that company.

Also be wary of an outfit that’s already in the habit of losing money. It’s often a sign that the company doesn’t have any idea where the leaks in the boat are — or how to fix them — and is building cash just to buy time.

Case in point: While it might be unfair to kick it while it’s down, JCPenney is a prime example of throwing away good money after bad. The retailer posted its weakest revenue in years in 2012, along with a loss of nearly a billion dollars, and 2013 is on pace to be even more pathetic.

JCP, under new/old chief Mike Ullman, says the worst is over, but cash is needed to restock stores and finish some needed remodels. That’s not the issue, however. What’s holding the company down is a couple of years’ worth of contempt for the customer, a rusty marketing shtick and a subsequent crimp in cash flow.

All the money in the world can’t undo that damage, and even if it could, JCPenney will need as much time as money to fix it. Even if its cash-bleed is cut in half, the company is still likely to be insolvent in a couple of years at its current rate, and that’s counting the $800 million it just raised by issuing new stock.

Bottom Line

The irony is, the investment-worthiness of a company raising money via a secondary offering has little to do with the offering itself. Good companies generally find productive things to do with extra cash in the coffers, while poor companies tend to waste it. That’s true whether or not the organization is in fundraising mode.

Ergo, the question you should be asking yourself is: Would you be willing to take on a stake in a particular corporation even if it wasn’t raising cash?

Either way, in almost all cases, either the announcement of a secondary offering or the issuance of those shares ends up being at least a temporary drag on the stock’s value. If you believe a company can use that capital to grow the top and bottom line, it still wouldn’t hurt to wait for the inevitable plunge in the stock’s price.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

©2017 InvestorPlace Media, LLC