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Tough To Pick The Bottom For Financials
Since the financial crisis began in earnest in 2008, banks and insurers have been desperately attempting to raise capital to meet surging delinquencies on loans, and cover both realized and unrealized investment losses.
IN PICTURES: Top 7 Bank Failures
Many of the investors who provided this capital probably thought they were buying at the bottom, and exercising good value investing judgment. However, a review of much of the capital raised over the last six months shows many issues far below the offering price.
Losses Abound
Investors who participated in the recent offering of Marshall & Ilsley Corporation (NYSE:MI) are down considerably since this diversified financial services company offered 100 million shares of common stock at $5.75. The stock closed on $4.50 on July 9, leaving investors with a loss of 22%. The company said that it might use the fund to pay back the preferred stock it issued to the government as part of the Capital Purchase Program (CPP) created in the Troubled Asset Relief Plan (TARP).
Another big loser for investors was Capital One Financial Corporation (NYSE:COF). Back in May 2009, the company offered out shares at $27.75 per share to interested investors. Investors who participated in this deal are out 24%. Capital One Financial was one of the 19 banks assessed in the Supervisory Capital Assessment Program (SCAP) conducted by the U.S. government in the same month.
Things could have been much worse for investors. CIT Group (NYSE:CIT) raised $300 million at $4.00 per share in December 2008. Investors were so excited that the company raised its offering from the original $250 million. The stock closed at $1.53 after it was discovered that the government
Coming Out Ahead
There were a few winners. Smithtown Bancorp, Inc. (Nasdaq:SMTB) raised $28 million in May 2009 through its offering of 28 million shares at $10 per share. The stock is currently at $11.11. The bank also raised additional capital in June with an offering of subordinated notes and warrants. Smithtown Bancorp had to pay 11% interest on these notes, demonstrating the risk that the market still perceives in financials.
Investors who put money into SunTrust Banks (NYSE:STI) are also a happy bunch. The bank offered 108 million shares at $13.00 per share. The stock closed at $15.32 on July 9, giving investors a healthy return.
A case can be made that it is not fair to assess the performance of these offerings on such a short-term basis, and they may work out as successful investments over a long-term time frame if investors can ride out the current recession.
The Bottom Line
The number of financial secondary offerings that are in the red demonstrates the difficulty in picking the bottom when investing. This is particularly true during a time of unprecedented volatility and fear in the markets. (Read Analyzing a Bank's Financial Statements and Is Your Bank On Its Way Down? to learn more about tools to enhance your financial analysis.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: Top 7 Bank Failures
Many of the investors who provided this capital probably thought they were buying at the bottom, and exercising good value investing judgment. However, a review of much of the capital raised over the last six months shows many issues far below the offering price.
Losses Abound
Investors who participated in the recent offering of Marshall & Ilsley Corporation (NYSE:MI) are down considerably since this diversified financial services company offered 100 million shares of common stock at $5.75. The stock closed on $4.50 on July 9, leaving investors with a loss of 22%. The company said that it might use the fund to pay back the preferred stock it issued to the government as part of the Capital Purchase Program (CPP) created in the Troubled Asset Relief Plan (TARP).
Another big loser for investors was Capital One Financial Corporation (NYSE:COF). Back in May 2009, the company offered out shares at $27.75 per share to interested investors. Investors who participated in this deal are out 24%. Capital One Financial was one of the 19 banks assessed in the Supervisory Capital Assessment Program (SCAP) conducted by the U.S. government in the same month.
Coming Out Ahead
There were a few winners. Smithtown Bancorp, Inc. (Nasdaq:SMTB) raised $28 million in May 2009 through its offering of 28 million shares at $10 per share. The stock is currently at $11.11. The bank also raised additional capital in June with an offering of subordinated notes and warrants. Smithtown Bancorp had to pay 11% interest on these notes, demonstrating the risk that the market still perceives in financials.
Investors who put money into SunTrust Banks (NYSE:STI) are also a happy bunch. The bank offered 108 million shares at $13.00 per share. The stock closed at $15.32 on July 9, giving investors a healthy return.
A case can be made that it is not fair to assess the performance of these offerings on such a short-term basis, and they may work out as successful investments over a long-term time frame if investors can ride out the current recession.
The Bottom Line
The number of financial secondary offerings that are in the red demonstrates the difficulty in picking the bottom when investing. This is particularly true during a time of unprecedented volatility and fear in the markets. (Read Analyzing a Bank's Financial Statements and Is Your Bank On Its Way Down? to learn more about tools to enhance your financial analysis.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Eric Fox
Eric J. Fox, CFA, is a freelance financial writer and has previous experience working in the asset management industry as an equity analyst and portfolio manager on the buy side. His favorite area to write on is the energy sector and he keeps current on the industry by reading Haynesville Shale, Permian Oil and Gas and various other blogs.
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