The other shoe hit the fan Wednesday when Newcastle Investments (NCT), one of my up-and-down picks for the year announced the pricing for a 15 million common share stock offering -- six bucks! -- considerably lower than the 52-week high of $8.85 the stock reached last month.
NCT closed Wednesday March 23 at $6.02.
In making this move, management seeks to raise $85.6million for future investments and operations. This is the management that guided the company back from the grave. I know, since I bought in at 60 cents. But with 62 million shares outstanding, the 25% dilution is a huge move. What are they thinking?
As a shareholder, I am hoping management already has a place to put some of this cash to work so that it will earn more than it's cost us. While one should have some trepidation, remember that the offering price now, which is aligned with the current share price, is close to a wash. As long as the funds are not used for planes and parties, the cash infusion should offset the dilution.
As a real estate investor I know there are a lot of opportunities for Newcastle. As a CMBS player, it should be able to lend at favorable rates as well as acquire real estate on the verge of a turnaround. Newcastle will no doubt have more flexibility with the substantial new liquidity.
Even at the reduced stock price NCT still has a very low P/E ratio of 0.55 on trailing earnings of $10.96 per share, and looking forward, the P/E is projected to be only 1.26. These are bargain basement figures. This is further characterized as so with a price-to-earnings-to-growth (PEG) figure of 0.54 when anything around 1.0 is good.
Even though the stock took a hit and investors pushed the stock down, I still view this as an opportunity. The more cautious investors might consider dollar cost averaging into the stock over the next few months to smooth out the periodic irrational behavior in the market.
Sheldon Liber AIA, is the CEO of Chasing Value™ Asset Management, Inc. He writes the columns Chasing Value™ and Serious Money and is on twitter: @ChasingValue. Disclosure: Mr. Liber currently owns shares of NCT.