When a company announces an offering, it is typically viewed negatively by the marketplace. Naturally, share dilution leads to a lower value for each share. Sure enough, when #RMED disclosed a $12 million offering on February 4, 2022, the market reacted negatively. The stock gapped down from $.70 to a 52-week low of $.325.
Though common convention among retail traders is to steer clear after company offerings, they actually present a compelling buying opportunity based on simple economic principles of supply and demand.
RMED Offering Details
The Ra Medical offering is for 9.535 million units at $.50 per unit, resulting in the estimated $12 million gross proceeds. Each unit consists of (1) common share, (1) Series A warrant with a $.50 exercise price and (1) Series B warrant with a $.50 exercise price. The offering is expected to close today (February 8, 2022) and also includes 14.47 million pre-funded units.
Offering to Opportunity
It is clear that the warrants present a dilution impact upon exercise, which is why the price dropped well below the $.50 unit rate. A lot of retail traders quickly exit upon dilution news.
The more important consideration is how do investors profit from units and warrants with a $.50 price. In simple truth, the private investors that purchased the units can only achieve profit on the warrants when they exceed their $.50 exercise price. The acquirers of the common shares sold into the market can similarly profit only when the share price goes back up.
It is this “recoil” action post-offering that often presents compelling price spikes soon after the offering closes. The excessive share supply turns into excessive holdings in need of price appreciation to achieve profit. And the private investors that hold the warrants control the action. Savvy retail traders recognize the financial implications of economic events and align their trading strategy.
What makes #RMED especially intriguing is its low 7.03 million share count prior to the offering.
Conclusions
Economic events in stocks create volatility and intriguing trading opportunities. Recognizing these opportunities and planning a trading strategy give retail traders an edge in achieving profit.
Disclosure: This includes opinions and ideas and is not trading advice. I currently have no position in #RMED, but have in the past and am considering opportunities. Always consider your own risk/reward and trading strategy.
