There was an easier way of generating oversized returns during the COVID market meltdown than picking winning ASX stocks.
It is a high-risk gamble to try to predict which stocks will race ahead of the S&P/ASX 200 Index (Index:^AXJO) during the extreme volatility.
Let’s be honest, not many would have dared pile into the Afterpay Ltd (ASX: APT) share price when it was sinking under $10.
Capital raising arbitrage
But some investors have found an easier way to make eye-watering returns. They just participate in every capital raising during the crisis as most ASX stocks that were desperately passing the can around are trading well ahead of their offer price.
In fact, data from Fresh Equities found that investors who jumped on the $8.5 billion in new share offers in May and June made an average of 59%, reported the Australian Financial Review.
There were 205 placements undertaken during the period with 76% (or 156 companies) trading ahead of their offer price.
Crumbs for retail investors
The share prices of 17 of these ASX companies have tripled in value, while more than 50 have doubled in value.
Anecdotally, we can see why as several high-profile cap raises have come off spectacularly well. Perhaps too spectacularly as retail shareholders have been scaled down with the lion’s share of the discounted shares going to institutional investors.
The National Australia Bank Ltd. (ASX: NAB) share price is a classic example. The bank, the only one of the big four, raised capital at $14.15 a pop. While the stock tumbled off its highs recently, it’s still 25% above the raising price.
What’s more, management made a massive scale back of the SPP to retail shareholders due to overwhelming demand.
The same happened in the case of the Breville Group Ltd (ASX: BRG) share price and several others.
Biggest returns from smaller stocks
But the best returns were to be had in the small caps space, according to Fresh Equities. Small gold and silver miners were the best performers with average gains of 103%, thanks in large part to the surging prices of both commodities.
In second spot were miners outside of the precious metals space with average returns of 83% while technology came in third with 51%.
The strong performance of cap raise candidates is one reason why I believe we will be seeing more companies tapping investors on the shoulder during the August reporting season.
It’s a pity that professional investors will again get the upper hand over the rest of us despite ASIC’s efforts to make such transactions fairer to retail investors.
Where to invest $1,000 right now
When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*
Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.
*Returns as of June 30th
More reading
- Analysis: Is the Woolworths share price good value in August?
- AMP and 2 other ASX 200 shares to watch this week
- 5 things to watch on the ASX 200 on Monday
- Is the Afterpay share price a buy?
- These were the worst performing shares on the ASX 200 in July
Motley Fool contributor Brendon Lau owns shares of Breville Group Ltd and National Australia Bank Limited. Connect with me on Twitter @brenlau.
The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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