Editor's Note: With this column, we introduce Ben Holmes' separate coverage of secondary offerings. While many might view secondary stock offerings as a poor cousin to the IPO market, knowing what is getting priced, and when, can help identify stocks about to see a big increase in their float, as Ben discusses with the Red Hat (RHAT) offering below. For a good introduction to the dynamics of secondary offerings, see Ben's excellent primer.
Well, January is over and things seem pretty much back to normal. This week I'm showing 11 secondaries slated to price. On each I've indicated my opinion based on a scale used on the
Web site. These opinions are based on the relative price strength of the issues from the time the offerings were filed with the
This scale is ranked best-to-worst:
- LOOKS GOOD -- This is the highest rating I assign to any follow-on deal. I expect these deals to produce a significant premium bid.
- LOOKS SHOT (i.e. it has a shot at performing well) -- The LOOKS SHOT rating is a coin toss, usually decided by where the deal is priced relative to its previous close. Pricing at the previous closing price is likely to lessen any chance of a premium, while a significant discount tends to help a stock's chances of delivering a profit.
- LOOKS FLAT -- A LOOKS FLAT rating is given to those deals where I feel a premium bid is unlikely, but downside to the stock's price is minimal. These deals are suitable candidates for what I call "payback" trades and "favors."
- LOOKS WEAK -- A LOOKS WEAK rating is assigned to those follow-on deals where the stock's price has lost some ground and shows signs of getting worse. I feel that these deals carry a measure of risk, but if priced correctly, may work.
- LOOKS RISKY --This is the lowest rating I assign to any follow-on deal, and is usually given to those deals whose stock price has dropped significantly since the financing was announced. These deals bring with them unwarranted market risk.
One secondary offering this week gives me a bit of pause. Red Hat is in the market to sell 4 million shares: 2.75 million by the company, 1.25 million by selling shareholders. Normally I don't get too worked up over a combination offering like this, but there is also a very large lockup expiration on Feb. 7. These two factors in concert, I believe, are what tore
share price apart last week.
Trust me -- nobody loves Red Hat more than I do. The problem is that approximately 121,159,408 shares of the company are becoming eligible for sale in a week. The chart tells me the rest of what I need to know.
Let's look at the secondary issues for this week:
As originally published, this story contained an error. Please see
Corrections and Clarifications.
Ben Holmes is the founder of ipoPros.com, a Boulder, Colo.-based research boutique (now a wholly-owned subsidiary of TheStreet.com) specializing in the analysis of equity syndicate offerings. This column is not meant as investment advice; it is instead meant to provide insight into the methods of new and secondary offerings. Neither Holmes nor his firm has entered indications of interest in any of the companies discussed in this column. Holmes' This Week in IPOs column appears Sundays, This Week's Secondaries appears Tuesdays, Upcoming Lockup Expirations appears Wednesdays and The Quiet Period appears on Fridays. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Holmes appreciates your feedback at