Are All Secondary Offerings Negative Events?

Pandora Media ($P) announced a secondary offering and it still went up to new all-time closing highs above $25. Its float will increase by 14 million shares, four million of which are sold by insiders.

LinkedIn ($LNKD) raised a billion dollars in a secondary earlier this month. It still made new all-time highs.

Zillow announced a secondary on August 19: 2.5M shares at $82. $Z is trading near $100 today.

In February 2013, Michael Kors priced a humongous secondary offering: 25 million shares at $61. $KORS is trading near $75 today.

Sure, there are plenty of examples of stocks being killed after announcing secondary offerings. The bull market in 2013 has been very forgiving and capable of absorbing secondaries.

On the surface, most secondaries are viewed as negative events for three main reasons:

1) A secondary represents an increase in company’s float, which dilutes current shareholders and potentially could lead to an increase in supply down the road. This is not always the case (the increase in supply) and i will explain why in a bit.
2) It is always priced below the current market price to entice institutions into buying big blocks of shares.
3) Insiders selling is always looked with suspicion.

Secondary offerings are an organized transfer of ownership, often from weak to strong hands. Counter-intuitively, they could be positive if there are enough institutions willing to participate.

Depending on who is selling, secondary offerings help:

1) companies to raise more cash for operating and expanding purposes. The companies are in stronger financial position after the offering. You raise when you can, not when you have to.
2) insiders sell in an organized manner. there is a transfer of ownership from insiders, who would sell on the open market anyway, to institutions, who are more likely to be long-term holders.
3) institutions to accumulate large blocks of stocks they want to own at prices slightly below market. If they had to buy the same number of shares at the open market, it would probably cost them a lot more. Institutional interest is generally considered a positive sign. If a stock runs from 20 to 40 and has a secondary at 35, the event could be considered a stamp of approval; a justification of the current prices in a way.

Remember, the market is designed to fool most of the people most of the time and it is often counter-intuitive.

In no way I am saying that secondaries are always positive events. I am just open-minded to the thesis that sometimes they could be. I am a big believer in the philosophy that “Reaction to news is more important than the news itself”. When I see a stock, making new all-time high after announcing a secondary, I consider that a really good sign.

Positive reaction to what appears to be “bad” news on the surface is bullish. When stocks don’t fall on bad news, good news is usually just around the corner.

At the moment of writing, I don’t own any of the mentioned stocks in this post. I am just sharing my thought process.