Highly active traders are no doubt familiar with secondary offerings, and the potential damage they can inflict on well-constructed portfolios.
“These offers often occur when there is good news or a strong chart and can be quite discouraging as they kill what are good-looking technical setups,” said James “Rev Shark” Deporre, writing in Real Money recently.
Deporre feels your pain, as he recently experienced the same ordeal building up a position in Hut 8 Mining (HUT) . Based in Alberta, Canada, Hut 8 is a cryptocurrency miner offering favorable pricing on energy, which is critical to crypto mining. It mines not only bitcoin but has diversified into ethereum.
“If bitcoin and etherium continue higher in the months ahead, then there is little doubt, in my view, that HUT will do quite well as well,” Deporre said. “I still like the trade, but the question is, how do you deal with this sort of setback when a good-looking trade now looks technically poor?”
Hut8 priced its secondary offering at $8.55, which basically renders the chart setup that was in place before irrelevant. “My approach is to use a mark-to-market approach,” he said. “I will now ignore my original cost basis and treat the stock as if I bought all my shares at the secondary pricing at $8.55. That is the only technical level that is meaningful at this point.”
If a secondary offering botches your trading charts, try resetting your thinking. “Many holders of HUT are likely disgusted by the negative surprise, and they will dump the stock and move on.” Deporre said. “They don't want the emotional cost of this failed setup to negatively impact them, so they take it off their screens.”
Still, not much has changed fundamentally to the stock and it retains robust support levels.
“The $150 million offering is fairly small for a stock with a market cap of around $1 billion,” Rev Shark added. “And nothing has changed as far as bitcoin or ethereum, which are acting well right now.”
So, yes, it’s highly annoying to have a good setup be ruined by a secondary offering. “The best approach is to look for the opportunity in the disaster, rather than dwell too much on what has already occurred,” Deporre said.