Toughbuilt Industries (NASDAQ:TBLT) may not be so aptly named. The construction equipment manufacturer has spent most of the month advancing steadily upward. TBLT stock shot up an impressive 110% last week, mostly on short squeeze momentum. As it surged late last week, InvestorPlace contributor Chris MacDonald posed the following question: “how much room does TBLT have left to run?”
As it turns out, not much. The company began this week with an announcement that quickly sent TBLT stock into a nosedive. A recent statement reported that Toughbuilt entered into “definitive agreements with institutional investors for the issuance and sale of 4,000,000 shares of common stock (or pre-funded warrants in lieu thereof) and preferred investment options to purchase up to 8,000,000 shares of common stock at an offering price of $5.00 per share (or pre-funded warrant) and accompanying preferred investment options, in a private placement priced at a premium to market under Nasdaq rules.”
TBLT stock reacted poorly to the announcement. It fell more than 25% in pre-market trading and didn’t stop after markets opened. As of this writing, it is down 27% for the day and shows no signs of a rally.
Let’s take a closer look at what Toughbuilt’s decision and why investors are concerned.
What This Means for TBLT Stock
Toughbuilt expects to collect roughly $20 million from the sale. The statement adds that it “intends to use the net proceeds from this offering for general corporate purposes, including working capital.” The sale is expected to close on July 27.
It makes sense that a company like Toughbuilt would want to quickly raise this kind of money. It jumped onto Wall Street’s radar on superficial momentum, and it needs a reason to stay there.
The company surged more than 90% over the past month purely on short energy. Its only positive growth catalyst came when Toughbuilt announced that its second-quarter sales at Amazon (NASDAQ:AMZN) had increased by 20%. But one positive report isn’t enough to keep a microcap stock elevated once it has surged by that much. This news means a significant cash influx which, in theory, will allow the company to grow.
Unfortunately, this type of action from a company tends to make investors nervous. Issuing additional shares of TBLT stock automatically dilutes current investors’ holdings. On top of that, priced at $5 each, the new shares of TBLT or pre-funded warrants are priced roughly 82 cents lower than its current price. When shares of a given stock are sold at a lower price in large quantity, that puts new pressure on investors who already own the stock.
The Bottom Line
Investors don’t have long-term confidence in TBLT stock. Even in the face of a red-hot housing market, it failed to gain any serious momentum. Now that homebuilding sentiment is falling, investors have even less reason to bet on a stock that has already proven unstable.
TBLT stock isn’t likely to rebound anytime soon as selling pressure mounts. This decision from Toughbuilt is likely to usher in the end of its rally.
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
