In a flat market like 2014 where stocks go side to side, it is nice to have a place where you can go to and get 4-5-6-even 7 % in a week’s time. Companies often raise capital via an new public offering of common shares. There are many ways of raising capital. Two common ways are as follows. The first, the company hires its underwriters and tells them they want to offer 5 million new shares on the market for 10$ per share, raising an extra 50 Million. The underwriters will then offer these new shares to their clients and sell these shares, behind closed doors. The company will then issue a press release stating that they have raised 50 M by offering new shares on the market. These types of deals are called “Pre Bought” new issuance of shares. In this market environment these types of offerings tend to “sell out” or better known as ” oversubscribe”. What is nice about these deals is the company always sells below what the stock is currently trading at. So for example, in order for the new issuance to be offered at 10$ as in our above example, the stock will be trading above 10.50$ sometimes as high as 12$. You can see how accretive it is to the people who participate in these offerings as they are already making a profit investment and/or bet.
The problem is unless your firm is of a certain size and you are able to commit, not only for this specific deal, but for any subsequent new issuance that comes out you will most likely not be getting a call from the underwriters (Goldman Sachs, JP Morgan, Credit Suisse, etc).
I like playing this special situation another way. Often, a company decides to announce they will be raising capital, but do not disclose the price of the offering. They usually disclose the price of the offering a few days later. When this happens, you stand a chance of making 4-8% in a relatively short period of time due to uneconomic selling. Readers must understand and be cautioned that this is a bet, and when you make a bet you must calculate what are the odds of you winning and losing. These bets are not long-term investments so you should not wait and hold. The advantage of these bets is that you know if you are right or wrong within a few days, sometimes a few weeks.