Record Stock Sales From Money-Losing Firms Ring the Alarm Bells
If you think a rush by companies to sell their shares is a bad omen for the market, imagine a scenario where most of the sales come from firms that don’t make money.
It’s happening now. Since the end of March, almost 100 unprofitable U.S. companies, including GameStop Corp. and AMC Entertainment Holdings Inc., have raised money through secondary offerings, twice as many as coming from profitable firms, according to data compiled by Bloomberg.
Granted, troubled companies are tapping into buoyant demand during a 16-month rally to beef up their balance sheets. And it’s further evidence that the capital market functions as smoothly as it’s supposed to. Yet some warn that the flood of shares coming from money losers is becoming extreme.
During the past 12 months, almost 750 money-losing firms have sold shares in the secondary market, exceeding those that make profits by the biggest margin since at least 1982, data compiled by Sundial Capital Research show.
“That perhaps points to companies getting greedy,” said Mike Bailey, director of research at FBB Capital Partners. “Anytime you have a bunch of selling by desperate companies, that could be a signal we’re closer to a top than a cyclical bottom.”
In fact, the previous two periods in which unprofitable firms dominated the pool of equity offerings, the S&P 500 Index was either at the start of a bear market, or already in one.
The 2000 episode showed what might be at stake. Back then, a similarly ebullient market lured profitless companies to offer shares. Once supply overwhelmed demand, the party turned into a scare. Stocks with no fundamental support sold off and the carnage spread to the rest of the market.