Chartology 201: How to spot public offerings

Many market technicians will say, “Give me a chart and I can tell you the history of the company.” They’re basing this remark on the fact the certain fundamental events give rise to specific technical chart patterns.

One such chart pattern is that of the public offering, our topic of today’s discussion.

First of all, many of you reading this may not know what the term “public offering” means. Briefly, a public offering is when a company sells shares to raise money to pay down debt or fund company expansion. When this is done for the first time, it’s termed an initial public offering, or IPO. After that, it’s just called a public offering.

There’s also another type of offering called the secondary offering. The reason it’s called “secondary” is because the company itself is not selling its stock and consequently is not profiting from the sale. The sale typically comes from a major shareholder who wants to diversify his/her holdings or for other reasons. This sale can be dilutive, meaning that their shares will add to the amount of shares on the market (i.e., the float), or non-dilutive.

Chartwise, these events are virtually indistinguishable. Let’s take a look at one of each culled from today’s (Tuesday’s) events:

OKS Chart 2-2-10

SXL Chart 2-2-10

Coincidentally, both of these companies are Master Limited Partnerships (MLPs) but the big difference is that Oneok (OKS) represents a dilutive public offering of 5.25 million units at $60.75 per unit.*

The second chart of Sunoco Logistics (SLX) represents a secondary offering. Its general partner, Sunoco Partners, is selling 2.2 million units of SLX at $68.85 for reasons not given. This is a non-dilutive offering.

You can see from both charts that the price/volume action is very similar to that of a company being taken over except that the price is lower, not higher.

What to do?

So, if you happen to be a shareholder of a company that comes out with a primary or secondary price offering, what should you do?

Unless the company is diluting its shares out of proportion (and you have to be the ultimate judge of that), I’d suggest you revisit your due diligence and see if you still want to hold on to it. If it hasn’t deviated from your initial ground rules, then stay the course (unless there are over-riding market or sector conditions). Sometimes this can be a great way to pick up shares in a good company at a discount.

But whatever your stance, at least now you’ll have a clue what’s going on when a chart of this type pops up on your screen.

* Because of tax considerations, shares in MLPs are termed “units,” and if you purchase them, you’ll need to consult with your accountant on how to handle them at tax time

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