The worst decliner in our model long portfolio Tuesday was TRW Automotive (NYSE:TRW), down 5.69%, due in part to the decline in the market and more likely due in part to its recent announcement to commence a 10 million share secondary offering. According to Bloomberg, parts of the management team and Blackstone are the sellers. The company stated it will receive zero proceeds and that impact to share count will be negligible.
Secondary offerings tend to “coincidentally” come right before peaks in stock prices, especially cyclicals, so it is no wonder that investors are spooked. But we would note that the company itself is not diluting shareholders or raising money, which sometimes can signal that shares are overvalued. In addition, we would note that we are just days away from the General Motors initial public offering, which could potentially be one of the biggest IPOs in history. It makes sense that a large investor may possibly be reducing positions in one auto-related stock and reallocating some to GM. We have no way of knowing if this is in fact what is going on, but it is something we would do.
TRW scores the highest possible score in four key factors we use to help choose stocks for our model portfolios: 1) Relative Value; 2) Operating Momentum; 3) Analyst Revision; and 4) Fundamental Quality. TRW is currently one of only four companies out of more than 3000 that score this high in our ranking update.
A secondary offering is never good news, but a nearly 6% sell-off even in a bad market for fundamentally one of the best companies in any sector seems a bit overdone.
Disclosure: Long TRW