[Here's a link to the full study](https://riskpremiumresearch.substack.com/p/forecasting-dilution)
I've noticed that companies will announce a dilution and, almost always, the stock will immediately tank.
I got curious and dug through the data of 10,000+ dilution events since 2016 and over 3,000 discrete dilution events since 2021 (pulling filing to the exact day of dilution announcement), and came to some interesting findings.
The hope is to use this information to avoid buying companies with immediate dilution risk or maybe even develop a trading strategy to profit from them.
# Forecasting Diluters
Running a logistic regression (I won't bore you here; see the article for methodology), I found that diluters can be forecasted with pretty high accuracy.
# Timing
Using the post-2021 data, I found that:
* [Dilution events spike in January, July, and October](https://substackcdn.com/image/fetch/$s_!HZQH!,w_1456,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fb2d9f0fc-6d77-45b2-bb38-c798b274e67c_731x404.png).
* [Dilution event happen earlier in the quarter](https://substackcdn.com/image/fetch/$s_!c5rq!,w_1456,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F27702648-25a4-4e94-a575-6f36ef957754_733x351.png)
* [Dilution events typically happen before or during earnings releases. ](https://substackcdn.com/image/fetch/$s_!2zBt!,w_1456,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F91d4aa05-ef23-49d7-a6c8-2c6bd835dc21_734x353.png)
# Post Dilution Performance
Using the post-2021 data, I found that while there's an initial drop immediately following a dilution announcement, [the real drag is a long term bleed in the stock price](https://substackcdn.com/image/fetch/$s_!J2mR!,w_1456,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Ff3082bd0-0ef9-438d-9b97-19dec0009a9d_3200x1682.png).
Using the full post-2016 data, I looked at the distribution of returns following a dilution event. [The return profile for diluters is a fat left tail - with heavy negative expected returns over a 6 month time frame](https://substackcdn.com/image/fetch/$s_!S_bV!,w_1456,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fd842ebb3-7d21-4b03-9f98-fca12f5e6c52_3200x1632.png).
Some work still needs to be done for the performance part - I'll need to correct for size and quality, probably (*i.e., expected returns for Google diluting look much different than LUNR*). I also want to look at different permutations of performance characteristics - for instance, can P(dilute) be used as it's own quality metric?
# Current At-risk Companies
Some of the big-name at-risk companies that were flagged in this screen (using Q1 data) were $SPCE , $AMC , $HTZ , $LUNR , $CRWV . All of these carried a 30%+ probability of dilution for Q3, all diluted, and all are down double digits since they diluted (two as much as 60% since the dilution event).
# Big Takeaway
At the very least, I think this metric can be used to inform our timing decisions for stocks that we want to buy. Notably, the bleed typically continues long after the dilution is announced or occurs, so there's no rush to buy after the initial drop.
I think this probably can be used as a trading strategy, but expected returns currently are driven more by the junky-ness of the company rather than pure dilution announcements. So more work to be done on the trading front.
