Dec
16

Secondary Offerings

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(Courtesy Briefing.com)

 

The main indexes currently have an upward bias (ES +5.5 at 7:31 ET) but we’ll get a ton of economic data beginning in about 1 hour from now. All of the data including the Fed’s rate decision at 2:15 ET could be market moving.

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Japan (EWJ) is up this morning on the rumor that stricter capital requirements for its banks are being delayed.

Japanese banks jumped on a rush of buyers after the Nikkei reported that the Basel Committee on Banking Supervision, which has been discussing introducing stricter capital requirements since September 2008, has agreed to effectively delay the enforcement of new capital adequacy rules for large banks, opting to create a transition period of at least 10 years.

Source: Marketwatch

I did end up picking up a small position in Citigroup at $3.51 yesterday as part of my TARP/Bank Bailout Portfolio. In the short term, the stock is likely to go lower because the secondary offering will be priced at a  favorable discount. I’m guessing it is in the $3.20 range. There is still a decent chance that the comfort of a floor under the stock could cause it to rise (similar to WFC yesterday) rather than to fall even in the short term.

Why the TARP/Bank Portfolio? If there has been one strategy that has worked well in 2009, it has been buying these secondary offerings. I have written about this topic previously but it appears to be ripe again.  Secondary offerings are dilutive and are normally considered bad for a stock. For example, tech companies often use secondary offerings so that the VCs can unload their investment to the public.

The secondary offerings we have seen in 2009 are much different. Most of the companies issuing secondary offerings were trading at very depressed prices because of bankruptcy risk (or in the case of banks, the risk of being shut down and/or nationalized).

For example, Las Vegas Sands (LVS) and MGM Mirage (MGM) along with Wynn Resorts (WYNN) pretty much control the Las Vegas Strip. Controlling such an important tourist destination and a license to print money (the casinos) has a lot of value. However, because LVS and MGM were so leveraged there was a high probability that these companies were going to go into bankruptcy. The bankruptcy risk is akin to tying a huge boulder to the stock. But if you remove the risk by issuing a secondary offering, the boulder is removed and the stock price bounces higher like a coiled spring. Put another way, the bankruptcy risk depressing the stock far outweighs the dilution to shareholders caused by the secondary offering.

While the opportunities to buy these secondary offerings might not be what it was in 2009, there is still opportunity out there. One thing you can do is set a google news alert for “secondary offering.” I buy these as part of a portfolio investment. This means that each position is in the .5-1% range.

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  • Back in $C at 3.25. Not a full size position. Still may trade down to $3-3.15.
  • CNBC confirming Doug Kass at $3.15 per share for $C.

    http://www.cnbc.com/id/34435773/site/14081545?_...
  • Some Citi price targets from Barrons - http://online.barrons.com/article/SB12609812721...

    Market talk suggests Citi may have to price the common shares as low as $3.25 to $3.35 a share to get the deal done. A price of $3.25 would happen to be the government's cost basis in its Citi stake, which it received during the summer when it swapped $25 billion of TARP preferred for Citi common shares. During the summer, the government was sitting on a 50%-plus paper profit when Citi shares topped $5 a share.

    At a price of $3.30, the offering will further dilute Citi shareholders, who suffered massive dilution earlier this year when the company swapped a total of more than $50 billion of preferred stock for common shares. Citi now has about 23 billion shares outstanding and the total could rise to nearly 30 billion assuming the bank is able to successfully market the giant equity offering.
  • $CNO is another secondary offering to follow. Offering price was $4.73.
  • Sold off my C position at $3.51. I'm going to wait until this gets priced and repurchase.
  • rosocecasita
    Cash is always a position, probably the rule i break the most.
  • One anecdotal thing that seems to happen over and over again is that when you have a target buy price and it gets hit pretty easily (for example, my $3.51 entry being the low yesterday), it means that the stock is going lower. When C was at $3.75-4 I thought $3.5 would be the offer price. But when it traded down to $3.5 I knew it had to be lower. Generally if you are patient you can buy these secondaries at the offer price.

    Cash is definitely a position.
  • rosocecasita
    I'll be honest, i haven't really figured out how to set price targets at all, so I don't know =)

    Still less then a year of experience trading stocks, what resources would you suggest to look into?

    (Books i've read: The intelligent investor, Turtle Trader, Elliot Wave Theory)
  • Doug Kass on twitter saying he heard $3.15 as the price of the secondary. Makes sense. Would be a 10% discount from today's close.
  • Oh, when figuring out C all I'm really doing is slicing off 10% from the expected closing price to arrive at a target. Everything is a balance. You want to provide yourself an acceptable margin so that you don't pay too much but you also don't want to be so conservative that you miss an entry. Sometimes mainstream publications also provide a target (like above).

    The books I recommend are Technical Analysis of Stock Trends (Edwards and Magee) and Tom Bulkowski's work on price patterns. I've never found a holy grail system nor do I expect that I will. I think being successful requires learning risk management (that book by Chande that I did a review on is pretty good for that). Once you learn to not lose money (at least not lose quickly). If you are good with managing risk, you can usually at least churn your account without taking significant losses.

    One other thing. I recommend new traders avoid trading options and stay away from leverage ETFs.

    The market is dynamic. My success has depended on spotting a few big trends each year. This year I did amazing during the first 6 months of the year buying all those junk long stocks and timing the March bottom correctly. I was not bullish enough for the last 6 months and have generally just churned my account. But being right about that one major trend was enough to make this year successful. Although I could have quit in May and saved myself a lot of time the last 6 months.

    I don't know what 2010 will bring but I'm trying to figure it out.
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