We are not making a judgment as to whether last week's actions in the market were over or underblown, we believe that markets are naturally volatile, and as an investor, you have to expect that there will be ups and downs. You can't forget the past.
We've said it before, we are not finding a great deal of value these days -- but that does not necessarily mean that the markets are ripe for a "correction," just means that we're coming up short where we turn over the rocks.
The most interesting story for us was the price action in PICO Holdings (PICO) this past week. The company hit a several year high recently at $47.75, but pulled back to $38.00: thats a 20% drop in one week. The stock was recently touted in an Oxford Club research piece, and this we believe was a driver of the recent run-up. Don't get us wrong, we love it when our stocks rise, we just prefer that it happen more gradually, for reasons other than what the newsletter of the day said.
Although the initial pullback reflected falling markets, the ultimate 20% drop had little to do with this. The reason for PICO's fall was because the company announced the private placement sale of 2.8 million new PICO shares for $104.5 million, or $37 per share, an amount well under current market price. Seeing that as the current value of the stock, investors quickly pushed shares south toward that level.
Is PICO's current fair value $37 because of the private placement? We believe the private placement does not represent the full value of PICO shares. The size of the deal is quite large, increasing PICO's shares outstanding by 18%, and we believe the $37 price represents a discount to the true value, not uncommon for such a large placement of new shares.
Perhaps the recent run-up to the $48 range put the stock ahead of itself in the short-term, while the pullback was an overreaction to the private placement price. Perhaps the truth is somewhere in between.
Disclosure: the author has a position in this stock.
PICO 1-yr chart: