Cramer's Mad Money - How to Trade a Secondary Offering (5/13/09)

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Wednesday May 13.

Trading Secondary Offerings: BB&T (BBT)

In the rust to raise capital, secondary offerings are all the rage and are a great way to make some money. Cramer used BB&T as an example of a company which had a very successful offering, and gave some tips on how to trade:

1. Check the fundamentals: don't buy a secondary offering of a company you don't like or whose management you don't trust.

2. Look at the discount: BB&T's offering was for $20, which was 25% less than last week's high. However, pricing can be tricky; it is important to find a price low enough that will keep buyers interested but will be high enough to force shorts to cover their positions.

3. How much interest is there: Investors need to call a brokerage to find out how much demand there is in a stock at certain levels. It is also essential to ask how many buyers are interested holding the stock. Long-term buyers force shorts to run for cover.

4. Buy Half at first: Cramer recommends buying just half a position at first and waiting for the price to fall before buying the rest.

Sector Rotation Is Here: General Mills (GIS), Johnson & Johnson (JNJ), Merck (MRK), Abbott Labs (ABT)

Sector rotation is here, which means that the recession is not off the table yet. There was an aggressive move of out cyclical names and into defensive stocks such as General Mills, Johnson & Johnson, Merck and Abbott Labs. Troubled retail sales, a hoard of secondary offerings and anti-Wall Street government sentiment were to blame for the new trend. Cramer thinks the government should put its reforms, such as salary caps for banks, on hold and let Wall Street take care of itself. Until then, it's time to buy drugs and consumer staples.

Mad Mail: Nordic American Tanker (NAT)

After one viewer complained that North American Tanker CEO Herbjorn Hansson made a secondary offering after saying he wouldn't Cramer agreed that the stock is a sell; "I'm tired of hurting people (by recommending it)," he said. Cramer also made a brief tribute to former FDIC Chairman, Bill Seidman, who passed away:

"The man served his country unbelievably well. I never even knew if he was Republican or Democrat. I always felt he called it straight. He did save the country, along with a couple of other good people, from a banking collapse. And he will be missed.”

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Comments

[Tom Armistead:]

Cramer's discussion of trading secondary offerings was helpful to a point, but:

Last year there were over 40 instances among the financials where secondary offerings or recapitalizations by smart money resulted in major losses for those who bought in.

I would be cautious - in most cases you are looking at a company that needs capital to replace losses - the danger is that the losses will continue, requiring further dilution.

May 14 07:13 AM