A stock offering is an opportunity for a publicly traded company to raise money for corporate investment, strengthening the balance sheet, and/or funding operations. Insider shareholders can also sell their shares to the public through a stock offering. Like any seller, these parties want to maximize the money generated from the stock sales. As a result, the launch of a stock offering is more likely during a large run-up in price. Stock offerings during a period of price weakness or a downtrend can warn about or even confirm underlying weakness in the company. In either case, the company or selling shareholders could be flagging a kind top in the price of the stock. An understanding of the price action from stock offerings helps interpret the implications of the sale.
Key Pricing Pivots for Stock Offerings
Three key pivots exist for understanding the price action around stock offerings.
- First, how does the company price the offering relative to the existing market price?
- Second, how does the market respond to the stock offering after the company prices the shares?
- Third, does the stock price move significantly before the pricing?
Pivot One: The Signal of the Sale
A stock offering priced close to the current market price of the stock, say within 1% to 3%, suggests the sellers think current prices fairly represent the value of the company. A close price also reveals the likely existence of strong demand for the shares. A stock offering priced well below the market price suggests weak demand for shares. The current elevated market price is likely the result of excessive speculation. Accordingly, the resulting gulf between the market price and the offering price creates a definitive topping pattern. Note that sellers should scale the price of the stock offering with the number of shares for sale.
Pivot Two: The Signal of the Buy
After the company prices a stock offering, buyers who signed up for the offering purchase the shares at the offering price. If the stock next trades on the open market below that price, investors are signaling expectations for a top in the stock. Firstly, buyers of the offering suddenly suffer instant losses on their shares and may be inclined to sell to limit losses. Secondly, investors in the open market are indicating their interpretation that the offering price is “as good as it gets” for now.
If the stock next trades on the open market above the offering price, investors are signaling a bullish interpretation of the offering. Investors may be relieved that the price was not lower. Perhaps the company printed up fewer shares than expected. Investors may conclude that the offering is immaterial to the previous price momentum. In the case of offerings for corporate purposes, investors may conclude that the new funds will ensure the success of key corporate milestones and objectives. Note that the price signal is strongest at the close of trading on the first day after the pricing.
In other words, a bearish signal occurs when the stock closes below the offering price. A bullish signal occurs whenever the stock closes above the offering price. A stock that does both in rapid succession is being tugged by conflicted traders and investors. Clarity hopefully comes with more time.
Pivot Three: The Signal Before the Pricing
Sometimes the price of a stock reacts strongly before the company prices the stock offering. Large increases in price are typically premature judgements and can reflect on-going speculative fervor. Large declines in price reflect market fears of a top from an imminent steep discount. Such a reaction can even force the company to reduce its previous plans for pricing the offering. Extremely severe sell-offs can even force a cancellation of the stock offering. In these cases, a company may announce it will wait for “better market conditions.” Regardless, traders and investors should not jump at the initial reactions before the pricing: wait for the company to finalize its move.
Example Stock Offerings
Stock offerings are very common, especially in a bull market. As a result, examples abound.
Cryoport Inc (CYRX)
After life sciences company Cryoport (CYRX) priced its offering at $66, the stock initially gapped down to $67.83 and traded as low as $64. However, the stock managed to close that same day at $73.75 and a 2.9% gain. That final bullish buy signal preceded an 11.3% gain the next day. Clearly, investors and traders are quite happy with the prospect of the offering!
Lithium Americas Corp. (LAC)
Lithium producer Lithium Americas Corp. (LAC) rallied for a 186.5% gain in just one month before the company announced a stock offering. The news came after the market closed on January 19, 2021. The next day, LAC fell 17.1% and put a serious dent in the previous day’s 30.6% run-up to another all-time high. Subsequently, the company quickly set a price for its stock offering at $22.00/share, right around where the stock closed in the wake of the first news. The pricing seemed to calm the waters. LAC ended the week with a marginal buy signal in a closing price of $23.23. Follow-on buying confirms the weak signal.
When medical device maker Soliton (SOLY) significantly undercut the market price of its shares with its stock offering in June, 2020, the stock quickly plunged well below the offering price of $8.30. The company created massive dilution for existing shareholders. In this case, the company was likely focused on the $35M it needed to raise and less concerned about the pricing required to secure the funds. Four months passed before the stock stabilized and finally closed above the offering price. The stock only recently experienced a solidly bullish breakout in anticipation of important FDA news.
When Tesla (TSLA) offered to sell $2B of stock in February, 2020, the company only provided tentative pricing guidance: “The estimated net proceeds are based on the assumed public offering price of $767.29 per share, which was the last reported sale price of our common stock on February 12, 2020” (pricing before the 5:1 stock split). The company rolled out additional news to keep the stock price supported. CEO Elon Musk announced he would buy $10M in shares. Board member Larry Ellison added he would buy $1M in shares. TSLA also released its annual report at the same time. The end result was an initial gap down in shares but a day ending with a 4.8% gain. A bullish signal triggered before the official pricing news. Subsequently, TSLA rallied another 14.1% before the pressures of the coronavirus pandemic weighed on shares.
Additional Examples of Stock Offerings
At the time of the initial writing of this post, I found a near laundry list of stock offerings just in the last three trading days. Many of these companies are in bio-tech. Investors should always expect follow-on stock offerings from bio-tech companies which are new and/or not yet profitable. These companies require a lot of funding to achieve their product visions and sometimes rush out to the public markets before finalizing products and/or solidifying business models.
Use the list below (or more recent news) to begin your own understanding of the price action around stock offerings.
- Golden Nugget Online Gaming (GNOG)
- Foresight Autonomous (FRSX)
- CohBar (CWBR)
- Passage BIO (PASG)
- Senseonics (SENS)
- Precigen (PGEN)
- Docebo (DCBO)
- Corsair Gaming (CRSR)
- AZEK (AZEK)
- Silvergate Capital (SI)
- Invitae (NVTA)
- Global Ship Lease (GSL)
- ARKO Corp. (ARKO)
- Merus (MRUS)
- OncoSec Medical (ONCS)
- Caredx (CDNX)
- Editas Medicine (EDIT)
- Inovio Pharmaceuticals (INO)
- CytomX Therapeutics (CTMX)
- Orchid Island Capital (ORC)
- Dyne Therapeutics (DYN)
- Chimerix (CMX)
- Athira Pharma (ATHA)
- Ucommune (UX)
- Uber (UBER)
- Rafael Holdings (RFL)
- Perion Network (PER)
- Aclaris Therapeutics (ACRS)
- Inuvo (INUV)
- Bionano Genomics (BNGO)
- Gevo (GEVO)
- Syros Pharmaceuticals (SYRS)
- Fulcrum Therapeutics (FULC)
- TCR2 Therapeutics (TCRR)
Companies can label stock offerings with different names: secondary stock offering, public offering, and follow-on offering.
Be careful out there!
Full disclosure: long PASG, long SOLY, short UBER, long CRSR, long GNOG