It's not a good day for investors in Home Solutions of America (AMEX:HOM). The homestead restoration and remodeling specialist saw its shares tank 14% this morning after the company announced the completion of a private placement.
What's a private placement? Why did Home Solutions' stock fall? What was it thinking? Good questions. Unlike a conventional secondary offering, where a set number of shares are allocated to investors as they are in a company's initial public offering, a private placement is usually completed behind the scenes, with a limited number of deep-pocketed investors. The terms are often dilutive.
In this case, the company sold 4,850,000 units at $5.50 a pop. Each unit includes a share of Home Solutions of America and a fifth of a warrant to buy an additional share at the same price. Home Solutions closed at $6.60 yesterday, so it's easy to see why nervous investors are heading for the door if the company is discounting itself so steeply for the sake of raising nearly $27 million.
Home Solutions was coming off a monster third quarter. Sales soared 157% higher and earnings per share came through with a 167% spurt. The company raised its guidance, in light of the fact that it was looking to earn between $0.25 and $0.27 a share for all of this year, then between $0.42 and $0.46 per share in fiscal 2006.
Despite the company's name, it's not exactly a housing bubble stock. Homebuilders like Lennar (NYSE:LEN), Toll Brothers (NYSE:TOL), and D.R. Horton (NYSE:DHI) have been providing conflicting reports regarding the state of the real estate development industry. Home Solutions isn't about that at all. If anything, the stock's popularity -- until just a few hours ago -- was based on Home Solutions as a hurricane play.
The company's restoration services include everything from fabric protection to repairing water damage. For the many Southeastern homeowners who saw their digs gutted, Home Solutions is also there to replace countertops and install new cabinetry.
Two years into an active cycle of hurricane seasons, it's pretty safe to say that Home Solutions won't be hurting for business, given its Southern base. It's a shame that the company had to resort to a dilutive private placement just as its story was starting to get good. Yes, the money raised will help the company tackle its debts. That's not the point. The timing is terrible: It throws the company into the camp of housing-sector stocks looking to cash in before the bubble bursts.
I thought that Home Solutions was better than that. I thought that it had a better plan to see it through the cyclical housing cycles. In my opinion, this private placement has become a public disgrace.
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Longtime Fool contributor Rick Munarriz has been living in the same place since 1999 -- but did refinance twice when borrowing costs got dirt-cheap. He does not own shares in any of the companies mentioned in this story. T he Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
