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Secondary offerings—an unexpected sign of strength?

Cramer: Learn to love secondary offerings
Cramer: Learn to love secondary offerings

According to conventional wisdom, a secondary offering is bad for existing shareholders. When a company makes a secondary offering, it's issuing more stock for sale, and that will bring down the price of the stock.

That's bad news, right? Not necessarily, said Jim Cramer.

Although the "Mad Money" host concedes that this logic of a secondary as bad news does make sense, he thinks it is an old fashioned way of viewing the market.

Today, a secondary could also be a signal that management is financially shrewd and that they're unlocking value in a less conventional way.


The share price of Facebook stock is seen at the Nasdaq stock market in New York.
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With interest rates at or near historic lows, "Companies have been issuing equity to either pay down debt or to refinance it with cheaper debt that carries a lower interest rate," Cramer said.

"The money saved on those interest payments falls straight to the bottom line improving the health of the balance sheet. In turn shares rally."

As an example, Cramer pointed out the many secondaries recently made by REITs. Ultimately those secondaries proved to be beneficial to shareholders.

"That's because the money the companies raised was used to pay down expensive debt or to refinance it with cheaper debt that carried a lower interest rate," Cramer added.

And the secondaries had other bullish effects, too.

"In some cases, the ratings agencies upgraded the firms because they carried less debt. In turn, the upgrade produced a nice move up in the share price," Cramer said.

"Also, newly raised capital allowed the REITs to buy more properties, which may lead to greater earnings power and higher dividends down the road—again a bullish development."

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Cramer is seeing the same phenomenon play out all over the market. Therefore, he thinks the way investors view secondaries should evolve accordingly.

"They used to be nothing but bad news for shareholders. But that's not the case anymore. Forget the conventional wisdom that says a secondary stock offering always means a company is in trouble." It just might be an extremely shareholder friendly move.

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