New issues of stock have been bought by unprofitable businesses at a record pace in the past year.
And the capital raised through these offerings has far outpaced that of profitable companies, a phenomenon seen only during the Dotcom bubble and the financial crisis.
The abundance of supply from questionable companies is yet another sign of extreme speculative activity, and it could be a warning sign for a stock market at all-time highs.
According to Sundial Capital Research, which uses Bloomberg data, there have been 748 unprofitable companies that have issued secondary or add-on shares in the last year, raising a total of $27 billion. According to the data, the amount of issuance on a rolling 12-month basis set a record dating back 40 years.
“A rising tide lifts all boats in life and markets,” Sundial Capital Research founder Jason Goepfert said. “And the rising tide of money has lifted the fortunes of many companies that would have sunk a long time ago.”
According to the data, only 254 profitable companies offered additional shares in the previous 12 months. According to the data, there have only been two instances in which unprofitable companies issued more net share offerings than profitable ones of this size – in 2000 and 2008.
The rush to sell new shares in money-losing companies comes as the stock market continues to rise to record highs after a historic recovery from pandemic lows. After a 16 percent gain in an unprecedented 2020, the S&P500 has risen another 15% in 2021.
Meanwhile, with the rise of retail trading, speculative activity has skyrocketed this year. Day traders in online chat rooms were able to create massive short squeezes in companies such as GameStop and AMC Entertainment, inflicting significant pain on short sellers and causing significant volatility in the overall market.
Secondary offerings are commonly used by companies to finance debt or make growth acquisitions. When companies with little fundamental support are able to sell more and more equity without negative consequences, this could be a sign that speculation is out of control.
“It’s about creating a market environment that allows for this to happen,” Goepfert explained.
Meme stocks are among the companies that have issued new shares through the secondary market.
AMC, the movie theater chain on the verge of bankruptcy, sold 20 million shares in two separate transactions last month, generating approximately $800 million in cash. CEO Adam Aron has indicated that he intends to sell up to 25 million additional shares. AMC earned approximately $1.6 billion in cash from stock sales from January to May.
GameStop has also used its massive rally to raise new capital in order to accelerate its e-commerce transformation. The video game retailer announced last week that it had sold 5 million additional shares, raising $1.13 billion in capital. This comes on top of a 3.5 million additional share offering in April, which raised $551 million for the company.
Ned Davis Research has also issued a warning about stock offerings that have reached a “excessively high level.”
The firm noted that there has recently been a trend reversal as supply has cooled, triggering a new sell signal. Ned David also emphasized the previous two sell signals, which occurred during the dotcom bubble and the financial crisis.
JPMorgan’s best stocks for July
JPMorgan has just included three new stock choices to its list of recommended stocks for different investing strategies for July.
Boyd Gaming and MGM Resorts International were added as overweight growth picks by the analysts, with State Street as a near-term pick.
Take a look at JPMorgan’s top ten picks for June:
JPMorgan expects strong demand trends for Boyd to continue “given a healthy consumer backdrop” and the “return of the core 55+ demographic,” according to analyst Joseph Greff. It also anticipates that post-pandemic operational adjustments and more efficient marketing will result in higher margins and increased exposure to Las Vegas locals, which will benefit supply and demand dynamics.
Similarly, the firm sees increased momentum in Las Vegas as a positive for MGM.
“Every week, revenues and margins improve, and [domestic casinos] are a segment that can drive positive estimate revisions,” Greff said.
He went on to say that MGM, through its online casino BetMGM, should continue to gain market share in online casinos and sports betting, and that neither company’s valuations give enough credit to the online gaming and betting opportunity.
State Street has been added to the list by analyst Vivek Juneja, who believes it will benefit from near-term technical interest rate adjustments and strong equity markets.
He also reiterated the bank’s confidence in US Bancorp, stating that the rebound in consumer spending and a return to travel should benefit its revenue in the future. The company’s revenue is heavily reliant on card fees, and its merchant acquiring business is heavily reliant on airlines and hospitality.