Seeking Alpha

Jared Sleeper's  Instablog

Jared Sleeper
Send Message
Jared Sleeper, a Junior in Harvard College, has invested a personal portfolio actively since 2005, and currently serves as a President of the Harvard Financial Analysts Club. He grew up working at his family’s small grocery store in Northern Maine, and has extended his love for business into a... More
My company:
View Jared Sleeper's Instablogs on:
  • The Importance of Monitoring Dilution
       Two of the most under-followed metrics in today's world of data driven stock analysis are market capitalization and historical shares outstanding data. Investors religiously look at historical price charts, price to earnings ratios and a host of other indicators and barometers, many of them increasingly sophisticated and complex. By ignoring market capitalization and especially shares outstanding, though, they are leaving a crucial element out of their valuation analysis that could leave them with wildly different results.
        This difference is caused by dilution. Many stocks, especially (but not exclusively) the small-cap start-up sort, turn to issuing new shares to raise working capital on an annual basis. For the companies, this is actually a great deal. They get additional capital without any stipulations, debt, or other strings attached... an improved balance sheet overnight! For investors, however, these financing activities can be devastating, since the new shares crowd out existing investors, lowering their ownership of the company and thus the share price. To help investors track this problem easily, I recently created a new website,, which makes the data easily and freely accessible to anyone. Using the site myself, I have discovered that the problem of dilution is more wide-reaching and pervasive that I could have possibly imagined.
       Perhaps one of the main reasons investors routinely ignore dilution is that, at the time of considering whether or not to buy or sell a stock the dilution has already occurred, and it truly does not affect them by being in the past. What is missing, however, is that rarely if ever to individual investors (or even, in some cases, institutional investors) consider future dilution in their corporate valuations. Take a run-of-the-mill start-up type small cap, for example, based loosely on companies such as Valence (VLNC), Hyperdynamics (NYSE:HDY) and many others like them (biotechs especially). On an annual basis, the share counts of this company increases by 25-30% (this is a generously small figure) and has for many years. As an investor, you think the company has a chance to growth at the same 20% growth rate it has in the past 5 years, yet it trades at a P/E ratio of less than 10. Ceteris paribus, should you buy it? As you have likely already picked up from the set-up, the answer is that it depends on what kind of dilution you assume. If the dilution stays the same, your shares will decline in value each year (real value, not necessarily share price given the fickleness of markets). If the company stops diluting, then it seems as though you have identified a slam dunk company. Tragically, many individual investors do not add this step to their analysis (after all, companies don't like to talk about dilution very much, as it works out very well for them), see a slam dunk and buy it, only to be disappointed when the discover that even though their company has doubled in size their investment is flat or down.                      
          Don't think that investing in proven, blue chip stocks will complete insulate you from these problems, though. Though few blue chips are as profligate in their share issuance as small caps, their growth rates are often lower, leaving the same potential issues in a rigorous valuation of any type. Many large companies, such as Microsoft (NASDAQ:MSFT), Exxon Mobil (NYSE:XOM) and Walmart (NYSE:WMT) are shareholder friendly, buying back shares regularly. Others, however, still issue new shares each year, often as employee compensation, even as they build hoards of cash. Some leading, successful tech companies, such as Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) continue to dilute their shareholder for no reason, saving on compensation costs at the expense of the owners of their company despite their massive amounts of cash. Regardless of the direction, for each of these companies the result is that a traditional discounted cash-flow model that assumes that a company's share count will remain constant is likely to be flawed, undervaluing companies like XOM and MSFT and overvaluing companies like AAPL and AMZN.                                                                                                   
          Raising awareness of this problem is the reason we founded, because individual investors must be able to easily and quickly find out the historical dilution of the stocks they are invested in. With this functionality now available freely and easily, companies that dilute have no place to hide, and investors should use, to the best of their ability, an informed awareness of past dilution to discount their valuation models. If you don't know the history of your holdings with regards to this vital issue, my advice is to look them up, either on our site or elsewhere if you would prefer. It will make your models more rigorous and hopefully help make you a better all-around investor.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Dec 12 2:31 PM | Link | 1 Comment
  • Back to Basics: Charting Market Cap and Shares Outstanding
          On October 1st, 2007, Dryships (NASDAQ:DRYS), the world's largest publicly traded dry bulk shipper, traded at $115.50 per share, with a market cap of $4.1 Billion. Today, the company has a market cap of roughly $1 Billion, less than a fourth of its high. Shares of Dryships, however, are down not 75% as one might expect, but instead a jaw-dropping 98%. $10,000 invested in DRYS at its peak would be worth only $200 dollars today! What caused this disparity? Over the same period, the number of shares outstanding of DRYS increased from 35 million to more that 350 million as DRYS issued new shares to raise capital, virtually wiping out the value of previous shareholders. Incredibly, however, ask an investor in DRYS today what its market cap was in 2007 and they are unlikely to have an answer. Indeed, it is not uncommon to see the following logic on message boards: "Once the market turns around, DRYS has the potential to soar again, back up past $20 per share,  like it was before!!!" As the preceding statements indicate, this logic is foolish and dangerous. In fact, of course, DRYS needs only to reach around $12/share to revisit its zenith, which was reached in the heady days of dry bulk when freight rates were many times what they are now. Despite being roughly 1/6th of its all-time high, a $20 share price for DRYS is, thanks to dilution, an utter fantasy barring a miraculous turn of events.
        Amazingly, however, modern free investing sites such as Yahoo! and Google Finance make accessing the data necessary to understand this difficult if not impossible. Here's a quick test: can you find the market cap of U.S. Steel in 2005? How long will it take you? 

         Any luck? Odds are, unless you are far better using Google than I am, you will have some difficulty. Perhaps, if you are lucky, you might find a website the promises the data if you sign up, or pay a monthly fee. More likely than not, you'll end up multiplying shares outstanding data by share price data yourself. It should not be that hard, and it isn't anymore., a new website made by Harvard students, combines freely accessible information to do the math for you, giving you the power to see historical market cap, shares outstanding and price data for any most any stock (the list grows every day). Now, there is no need to trawl through SEC documents looking for shares outstanding, or guess whether or not a company regularly dilutes its shareholders... the information is simply at your fingertips. In many cases, the story is scary. The sharecounts of companies such as U.S. Steel (NYSE:X), Ford (NYSE:F) and Citigroup (NYSE:C) have increased by 60%, 100% and 570%, respectively, over the past decade, leaving shareholders in the dust relative to the value of the company they invested in. For example, since 2002 the value of Ford has doubled to near 40 Billion dollars, but a shareholder holding since then would find his shares down 30%! The lesson is simple: any shareholder holding a stock without monitoring its history of share dilution is setting himself up for disaster, even if the underlying call is correct.
          Thankfully, however, there are happy stories to be found. Many companies, such as Microsoft (NASDAQ:MSFT), Walmart (NYSE:WMT), and Exxon Mobil (NYSE:XOM), have regular histories of buying back shares of their company, returning value and generating returns for individual investors in excess of their market capitilization. In the past 10 years, even though Walmart's market cap has fallen, its shares have still had (slightly) positive returns, outperforming Ford's markedly despite Ford's spectacular increase in valuation. Individual investors of all types would do well to pay attention to these vital types of data, especially now that they are available in such a free and easy way. No matter how you do it, though, keeping tabs on the shares outstanding of companies you invest it is an irreplaceable part of the ongoing due diligence each investor must maintain to have a chance of beating the market... you should always know if the cards are being stacked against you, or if they're tilted in your favor! 

    Happy trading,


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Dec 10 11:40 PM | Link | 3 Comments
Full index of posts »
Latest Followers

Latest Comments

Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.