Cramer: How to Trade Secondary Offerings

Investors shouldn’t miss the flurry of secondary offerings hitting the market right now, Cramer said Wednesday. As companies raise much-needed capital to pay down debt or, in the banks’ case, pay back the government, new shares are being priced at a tremendous discount. So much so that it doesn’t matter much if the company itself is all that good.

Cramer rarely recommends a company that lacks the solid fundamentals to support his call. But there are just too many cheap stocks for sale right now in a market that continues to surge higher. Investors have made money on virtually all of the secondaries we’ve seen recently, even after the Dow’s 184-point drop today. It is important then to know how to trade these offerings.

Enter Cramer, who used BB&T to show viewers how it is done. Step one? Always compare the offering price with that of the latest trade. BB&T priced 75 million shares at $20 a piece on Tuesday night. That’s a 10% discount to the day’s closing price and a 25% cut from last week’s high, which is just too good for any investor to ignore.

Beyond checking for that discount, be sure to find out the demand for the stock as well. This is just as important because too much or too little won’t work. The market’s interest has to be just right. No one would want BB&T as $22, the last sale price, and $21 wouldn’t be all that more enticing. Nor would it prompt short sellers to cover their positions. But at $20, you’ve got investors’ attention, and as a result the shorts are forced to cash out.

How do you check the demand, though? A full-service broker, Cramer said. They contact what is known as the syndicate desk, which tells the broker how many buyers there are and how much interest there is at the $20 level. He’d also tell you that the buyers coming in are committed for the longer term, and that’s why the shorts will start selling – they realize BB&T isn’t going any lower, not with this renewed interest in the stock.

Even if BB&T meets these criteria, investors still don’t want to buy an entire position at once. Grab just half at first, in case the stock “breaks” the print price. This will happen if the stock wasn’t “softened” properly, Cramer said, which means that BB&T wasn’t hurt enough to drive out all but the most committed shareholders. When it comes to these secondary offerings, the softer the better.

Lastly, after the deal is priced and trading, the broker has to “stabilize” the market by supporting the “bid.” Stabilizing is the attempt to keep the stock at one level until the buyers arrive. Luckily for investors, BB&T’s broker left plenty of stock to buy after trading opened. The stabilization was so good, in fact, that Cramer called it one of the best he’s seen lately. Even on par with Wells Fargo, which jumped $6 after the deal was priced.

Admittedly, caution cost us this time. BB&T priced well, was stabilized and saw plenty of buyers. So if you followed Cramer’s rules, you only got half your position in. But then again, you still made good money – and that’s all that matters.

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