Money-losing companies are selling a record amount of stock, triggering a rare market sell signal

Published Fri, Jul 2 202111:59 AM EDTUpdated Fri, Jul 2 20213:08 PM EDT

Unprofitable companies have sold a record amount of new stock the last 12 months. And the capital raised from these offerings has far surpassed the sum raised by profitable companies, a phenomenon only seen during the Dotcom bubble and the financial crisis. The overwhelming supply from questionable companies is a another sign of extreme speculative activity and could be a warning sign for a stock market at record highs. There have been 748 unprofitable companies issuing secondary or add-on shares over the past 12 months, raising $27 billion in total, according to Sundial Capital Research using Bloomberg data. The amount of issuance on a rolling 12-months basis marked a record dating back 40 years, the data said. "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 otherwise would have sunk long ago." In contrast, the data showed only 254 profitable companies offered additional shares over the past 12 months. There have only been two instances where unprofitable companies issued more net amount of share offerings than profitable ones near this magnitude — in 2000 and 2008, the data said. The rush to sell new shares among money-losing companies comes as the stock market keeps rising to record highs following a historic rebound from the pandemic lows. The S & P 500 has climbed another 15% in 2021 after a 16% gain during an unprecedented 2020. Meanwhile, speculative activity exploded this year with the rise of retail trading. Day traders in online chatrooms managed to create massive short squeezes in names like GameStop and AMC Entertainment, which inflicted huge pain for short sellers and jolted volatility in the overall market. Companies tend to undertake secondary offerings to finance debt or making growth acquisitions. However, it could be a sign that speculation is getting out of control when companies with little fundamental support are able to sell more and more equity without negative consequences. "It's about a market environment that allows this to happen," Goepfert said. Meme stocks are among the companies that tapped the secondary market to issue new shares. Last month, AMC — the movie theater chain that was on the brink of bankruptcy — sold 20 million shares in two separate deals and generating around $800 million in cash. CEO Adam Aron has signaled he wants to sell up to 25 million more shares. From January to May, AMC raked in about $1.6 billion in cash from stock sales. GameStop has also taken advantage of its massive rally to raise new capital to accelerate its e-commerce transformation. Last week, the video game retailer said it sold 5 million additional shares , raising $1.13 billion in capital. That's on top of an offering of 3.5 million additional shares in April, which raised $551 million for the company. Ned Davis Research also sounded the alarm on stock offerings that have gotten up to "excessively high level." The firm noted that recently there has been a reversal of the trend as supply cooled, triggering a new sell signal. Ned David also highlighted the two prior sell signals, which occurred during the dotcom bubble and the financial crisis.

Traders work on the floor of the New York Stock Exchange.

Brendan McDermid | Reuters

Unprofitable companies have sold a record amount of new stock the last 12 months.