Investors considering Albertsons (NYSE:ACI) stock should forget the pandemic when evaluating the grocer’s shares as a buy, hold, or a sell. The pandemic will not last forever. Consumer shopping patterns will not be drastically different moving forward. Families are largely going to return to shopping in the same manner that they did prior to the novel coronavirus. Analysis of ACI stock that begins and ends with discussions of a “new normal” and accelerated changes in the consumer landscape aren’t worth much. 

Instead, investors ought to be concerned with a few other lingering questions regarding Albertsons stock. To begin with, why did Albertsons IPO fall so flat, so quickly? Next, ponder why the stock is down following an earnings beat? Even a minimal due diligence on ACI shares is likely to lead investors to approach this stock with trepidation.

The week before Albertsons issued their IPO, management had hoped to sell shares between $18 to $20. A week later, on June 26, they would cost only $16. The company had also hoped to issue 65.8 million shares in that initial float. However, the following week, the offering put out 50 million shares, 25% fewer than anticipated. 

ACI Stock Financing was Lacking

Had Albertsons issued 65.8 million shares somewhere between $18 and $20, the company would have raised between $1.184 billion and $1.36 billion. That more-modest issue of 50 million shares at $16, produce $800 million. And while IPO expectations don’t always pan out as anticipated, this was a big difference. The retailer raised roughly between $380 million to $560 million less than it forecast a week earlier. Markets are not going to beat down the door to get in following such an IPO. 

Further, initial trading following the IPO was bad. ACI shares closed at $15.45 following their first day of trading. And as of this writing, ACI sits at $14.95. 

Negative Momentum for Underperformers

Investors need to know what trends exist in this kind of situation. Unfortunately, for Albertsons, there is negative momentum following IPOs which underperform at issuance. According to research by University of Florida Professor Jay Ritter:

• IPOs that trade down on the first day tend to have negative momentum for the following year.
• IPOs which were flat or negative on their first day underperformed comparable IPOs by 6.3% on average. Those that traded up, outperformed by 2.3% on average for their first year. 

Therefore, markets are unlikely to soon be keen on Albertsons given the less than fortuitous start. 

Albertsons’ Private-Equity 

Investors should pay attention to the financiers backing this IPO. The money raised by the IPO went to Apollo Global Management (NYSE:APO), which had a 17.5% stake in ACI. While Cerberus Capital Management sold 28 million of the 50 million shares issued, and now retains 31.1% of shares. 

The money from the IPO went to investors who had been with the company for a long time. This is an important point of distinction because the money isn’t reinvested into Albertsons’ operations. The financiers certainly profited, but investors should question what a share really represents here.

Private equity financiers wanted to get a return on their investment, and that seems to be what has happened. Albertsons’ CEO Vivek Sankaran gave the narrative that the company was rewarding its long-standing investors. Yet, another, less positive spin is that those private equity firms got paid, and the remaining shares have been somewhat gutted. 

Down Following an Earnings Beat?

Common investor sentiment is that shares rise following earnings beats. Albertsons beat analysts’ EPS expectations of $1.32 with a $1.35 posting. Further, revenues of $22.75 billion slightly bested expectations of $22.71 billion. 

Albertsons is not providing guidance and markets are somewhat puzzled how to interpret of the price decline. Some speculated that investors were hoping for more. Market sentiment suggests that despite the positive news, it wasn’t enough. Investors should be worried about ACI shares in my opinion.

Bottom Line on ACI Stock

To be sure, ACI stock has not had a strong start. Sales are high. The situation should benefit the company. People are shopping for groceries more, and eating out less. The company is generating money and doing well. Albertsons should be able to entice investors with its shares, and yet it hasn’t been able to.

Data suggests that shares likely won’t pop up for a year following the lackluster IPO. I can see no reason to buy in when ACI can’t provide investors price appreciation in boon times. 

As of this writing, Alex Sirois does not own shares in any of the aforementioned stocks.