- Investment strategies
- Why invest in the stock market?
- Buy and hold or technical analysis? Why you need an investment plan
- Value investing and short selling in volatile markets
- Using technical analysis to support value investing
- Investing in the unexpected
- Franking credits, explained
- What is dividend stripping and is it a sensible strategy?
- Investing in quality IPOs
- How to invest in stocks that benefit from a moving Australian dollar
- Reasons to avoid bonds when interest rates are low
- How value investors use Skaffold
- Quality, growth and value = a winning strategy
- Know your investor type and boost your performance
- Technical + fundamental analysis = better buy and sell decisions
- Fundamental investing
- Value investing and the price earnings ratio
- Intrinsic valuation models and methodology
- Value investments or value traps?
- How to find value stocks in a bull market
- Find value investments in expanding markets
- Why capital raisings struggle to add investment value
- How to value an insurance company
- Top stocks
- 5 qualities of top stocks
- How to find stocks with a competitive advantage
- Why return on equity is the best measure of business performance
- Using cash flow to find value investments
- Finding high quality dividend stocks
- Debt is not always a dirty word
- Why Skaffold share investment software makes sense
- Using economic factors to uncover the best investment options
- How do experts find top stocks to invest in?
- Investing in global stocks
- How to invest in international shares on global stock markets
- Benefits of investing in international shares
Investing in quality IPOs
Size alone doesn’t guarantee instant IPO success.
Not all IPOs are good for investors. The number of wealth-destroying floats in recent times serves as a healthy reminder that not all floats will necessarily make you money, either short-term or even over the long haul.
The share market has no shortage of IPOs that bombed. Collins Foods (CKF) and Myer (MYR) have both struggled to trade above their float price. And if Boart Longyear (BLY) is any indication, there’s no guarantee these stocks will rally any time soon. Since floating in 2007 BLY’s share price has fallen more than 97 per cent.
Size alone doesn’t guarantee instant success either.
IPO KPIs for value investors
So don’t get sucked into buying overpriced and overspruiked companies wired to uninspiring sectors with questionable growth projections destined to lose you money. To avoid future disasters you need to pressure-test your argument for IPOs against key performance criteria. The following list of IPO tips should help you unearth the next Flight Centre (FLT) and avoid the buying the next Myer (MYR).
1. Stick to your value investing principals
The principals of value investing apply as much to IPOs as they do to any other listed company. So you should be attracted to the floats of companies with consistently above-average return on equity (ROE), with little debt and not too much goodwill on the balance sheet. On the flipside, steer clear of buying into floats where the net tangible assets (NTA), or net worth (pre-IPO), as happened on the Myer float, is negative.
2. Floats are designed to make money for the sellers
Remember that companies don’t engage in philanthropy when they decide to float a stock. They have their own interests at heart, not yours. The decision by Myer’s private equity owners to sell down their entire 100 per cent stake highlights the importance of timing an IPO when investor appetite is very forgiving.
It’s understandable why sellers want to get out at a time when they can get the best prices, but remember that also means you risk buying into an IPO at the top. Other floats involving a sell down by private equity owners include Penrice Soda Holdings (PSH) and Kathmandu. Both had equally bad results for investors. So if you’re contemplating buying into a float where the people responsible for turning the company around plan to immediately exit the business – DON’T.
3. Invest in the business, don’t focus on short-term gain
As a value investor, you should be more interested in investing in an IPO for the long term than “stagging” or selling immediately after the IPO for a quick profit, which could potentially see you “blacklisted” by a broker from future IPOs. Given that a company’s (IPO) glossy prospectus is also an advertising document, you need to see through the hype to the underlying quality of the business and its core earnings. What the prospectus is unlikely to reveal is the reason why owners are selling out, so make a point of finding out yourself.
4. Do thorough research
It’s equally important to investigate previous financial statements of companies planning to float. Also find out whether the money raised is being earmarked to fund expansion or repay debt, and the amount to be paid to existing owners.
5. Words of wisdom from Warren Buffett
Warren Buffett, the world’s most successful investor, expressed his cynicism towards IPOs in the following quip. “It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller to a less-knowledgeable buyer.”