Editor’s note: This article was first published in December 2012; its commentary on Banco Popular’s rights issue that year and the share price levels it cites are from that time. Banco Popular was resolved in June 2017 and sold to Banco Santander for €1, wiping out its shareholders. Banco Popular was resolved by the European authorities in June 2017 and sold to Banco Santander for one euro; its shareholders lost their entire investment. This article is kept as a historical record and is not investment advice.
Many analysts, for whatever reason, were putting out the message “Don’t take part in the rights issue”. Our message, of course, was the opposite: “buy Banco Popular rights, because they are a profitable investment in the medium term”. In the end the capital increase was more than covered during the subscription period, the price of the rights shot up and everything was going smoothly, but…
Something has happened again that tends to happen in capital increases of this kind (when shares are subscribed at a price far below the market price). In these cases, and take note for next time, you should buy rights, NOT shares. If the shares rise in step with the rights, then when the new shares start trading, those who bought the rights and find themselves sitting on a 15, 20 or 40 percent return will mostly decide to take that “bird in the hand”, just in case.
And when most of them want to lock in those high returns, mass selling begins and panic spreads to everyone else, who watch the price sink and fear losing the gains they had made. Basically, a race begins in which the last one to sell is the fool.
Technically, Banco Popular is starting to form a dangerous pattern, as it has entered what the stock market calls a “flow back“, which is profit-taking after strong rises before the uptrend continues. With Popular, though, things could get complicated, because the only support reference we would have is €0.537 (the lows reached so far), and that can’t even really be considered a support.
If it loses €0.537 (let’s leave a margin down to €0.529), the best thing would be to get out of the stock and wait for it to show some sign that buyers are coming in. That said, it wouldn’t make much sense for Banco Popular to fall below €0.50, although nobody can predict what is going to happen.
Featured image: P4K1T0, CC BY-SA 4.0, via Wikimedia Commons.
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