Key points:
- Ocado dropped 5% on a new share issuance overnight
- What matters for the short term share price is how that stock was placed
- The more it's with short term traders the weaker the price will be
Ocado (LON: OCDO) shares dropped 5% overnight as the company conducted a possibly opportunistic capital raise. What matters for the immediate future of the Ocado share price is how those new shares settle into holders' hands. The more of the issuance which is in the hands of short term traders the more fragile that price will be. The more that has gone into long term institutional hands then the stronger it will be. Short term and immediate trading decisions are really bets on how that placing has gone.
This issue was at a 9% and change discount to the prevailing price of 877p last night, for an issue price of 795p. This was all done extremely quickly too – the announcement of the potential offer was at market close, the announcement of the completion was just after 7 am this morning. That's, even by the standards of these things, pretty swift.
The capital raising gained close to £600 million which the company now says funds all its plans off into the middle distance. In one way that's a weight off the Ocado share price as it does mean that they're not likely to be back for more capital through dilution any time soon.
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It's worth noting that there were no preemption rights here. Extant shareholders did not gain access to “rights” which allowed collection of some of that 9% discount. It was possible to take part in the retail offer but of course that rather required being available and online yesterday evening. So not much time for sober consideration of the offer by retail shareholders.
There is room for the long term consideration of how Ocado is going to do, of course there is. Given that the company has been going as long as it has and yet has only made profits twice there's obviously that thought that, well, when? Which is perhaps what has made the Ocado share price come off those white hot heat of technology highs recently.
However, as traders what we're more interested in is any short term move in Ocado's price that we should either be aware of or try to trade. Here, with rights issues and new issuances, the trick is “how secure are the holdings”?
When offered stock at a 9% discount clearly some funds and institutions will say that's a nice price and buy some. 9% is, after all, 9%. Of course, with more shares around and today's price fall that's only around a 4% profit now. But, well, 4% is 4%. The issue of what Ocado's share price will be next is how those buyers from yesterday react to today's price.
Some number of the buyers will be those who wanted to hold more Ocado for the long term. Being able to buy in cheaper than market is nice. Others of those buyers will be those looking for a quick turn on under the market Ocado shares. As those in that second group take their profits then the Ocado share price will remain weak. As the shares end up in long term hands then it will strengthen.
Which is what our own trading decision is really about. How many of those new Ocado shares do we think are in long term hands, how many still with short term traders looking for a quick profit?
