Unprofitable Companies Are Flooding The Market With Stock Offerings: What Does It Mean?

AMC Entertainment Holdings Inc AMC and GameStop Corp. GME are the two highest-profile examples of stocks adopted by retail traders that have soared in 2021 — even while the underlying companies were on the brink of financial disaster.

GameStop and AMC have both taken advantage of this unlikely scenario to sell millions of new shares of stock into the market via secondary offerings, diluting existing shareholders but raising the critical capital they needed to survive the pandemic.

Bubble Sign? There’s certainly nothing wrong with a company taking advantage of overly enthusiastic investors, but SentimenTrader.com founder Jason Goepfert is one of several market experts getting uneasy about just how many unprofitable companies are now turning to secondary offerings.

He recently pointed out that the ratio of unprofitable-to-profitable companies issuing new equity has recently exceeded previous peaks during the dot-com bubble and the mortgage bubble.

According to Bloomberg, 254 profitable companies have completed secondary offerings in the last 12 months. In that same period, 748 unprofitable companies have done the same.

Related Link: AMC Announces Another Stock Offering, Warns Investors They Could Lose 'All Or A Substantial Portion' Of Their Money

What Does It Mean? While the total amount of funding that has been raised from these offerings is still relatively modest compared to the size of the overall market, Goepfert said the takeaway could be larger than a couple of stocks or a few billion dollars.

“It's not about the amount of issuance; it's about a market environment that allows this to happen,” Goepfert recently said.

Stansberry Research lead editor Dan Ferris said he’s not surprised so many investors are willing to buy shares of money-losing companies like AMC and GameStop given their willingness to buy Dogecoin DOGE/USD.

“It's exactly what you would expect in a world where a crypto joke is now worth tens of billions of dollars. And it's exactly what you would expect in a world where stocks are priced to see average annual losses for a decade,” Ferris recently wrote.

Former hedge fund manager Whitney Tilson said last week that secondary offerings by unprofitable companies are simply “more signs of foolishness in the markets,” but the fools are certainly not the companies themselves.

“To be clear, these money-losing companies are very smart to issue a lot of stock at high prices – it's the investors who are going to get burned,” Tilson wrote in his daily newsletter.

Benzinga’s Take: AMC management can certainly say they’ve done everything they can to try to make sure investors understand the situation with its stock offerings, including adding the following warning to the company's most recent offering filing in early June:

“Under the circumstances, we caution you against investing in our Class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment.”

Photo: courtesy of AMC.