Secondary Offering Drops
Q: A company in which I’m invested has announced a “secondary offering,” and shares dropped some after the announcement. Is this bad news?
– C.F., Batavia, New York A: Not necessarily. To start, understand that an initial public offering, or IPO, is when a company first issues shares that will trade on the public market. At the IPO, the company receives money from selling these shares. Afterward, when shares are bought and sold between investors, the company doesn't participate in or profit from those trades. A secondary offering is when the company offers additional shares on the open market at a later date.
There are two main kinds of secondary offerings. In one, the company seeks to raise more money, so it creates and sells more shares. That can help the company, which can be good for shareholders. But it can also hurt shareholders because creating new shares dilutes the value of existing ones. Imagine a pizza: If it's cut in four equal pieces and you own one, you own a quarter of it. But if it's suddenly cut into eight equal pieces, your piece of the pie is now smaller.
Another kind of secondary offering is when shares that already exist are sold into the market. Insiders or private equity firms, for example, may own millions of shares, and will occasionally sell some to raise money. This doesn't dilute existing shares' value, though it might indicate pessimism on the part of an insider.
Vaccine Risks
My dumbest investment was buying shares of Novavax out of a fear of missing out. It promptly headed south. It was only a small position, but I'm keeping it in my portfolio so that it can either recover or stay low to remind me not to follow the herd. – S., online
The Fool responds: It's easy to see where your fear of missing out came from: The stock began 2020 as a tiny company with a market value near $100 million and a share price around $4. By mid-august 2020, its share price had soared above $155.
What was going on? Well, the company had a well-regarded flu vaccine, Nanoflu, on the path to approval by the Food and Drug Administration (FDA), and its entry into the race for a COVID-19 vaccine sent shares soaring.
Those buying into the company when you did were largely speculating, because its stock was priced as if it already had a COVID-19 vaccine approved by the FDA and selling briskly in the market. Such investors could do well if those events come to pass, but there's no guarantee they will.
Name That Company
I trace my roots back to 1919, when a guy in Barcelona started selling yogurt through pharmacies to improve the health of people after World War I. During World War II, I launched in the U.S., with some strawberry jam mixed in. Today, with more than 100,000 employees in more than 55 countries and products sold in over 120 countries, I'm a global leader in fresh dairy and plant-based products. My brands include Actimel, Activia, evian, Horizon Organic, Oikos, Silk and Volvic, among others. I rake in more than 23.6 billion euros annually. Who am I?
Last Week’s Trivia Answer
I trace my roots back to 1962, when a veteran from Oklahoma with variety store experience opened his own store. I went public in 1970. By 1990, I was America's biggest retailer. As of 2000, I employed more than a million people and sported nearly 4,000 stores and clubs worldwide. More recently, I had over 10,500 locations (in 24 countries) and my global workforce topped 2 million. I serve about 220 million customers each week. My fleet recently featured 6,100 tractors, 61,000 trailers and more than 7,800 drivers – who annually drive, on average, 100,000 miles each. Who am I? (Answer: Walmart)