Are You Ready for The Next Hot IPO...?
‘It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on any given day, the most attractively priced is the one being sold by a knowledgeable seller to a less knowledgeable buyer.’
Warren Buffet
There is often a lot of noise in the markets around the next hot IPO (initial public offering), but is this method of investment really the deal of a lifetime?
Similar to Warren Buffet’s view, we at AJ Financial Planning have traditionally been pretty sceptical about investing into these types of new listings. This is largely because we find they are often surrounded by slick PR and marketing teams that list the company to perfection, to optimise the returns for the selling party.
An example of this was Dick Smith’s IPO, which was listed back in November 2014 at $2.20 per share; today, they trade at 0.74 cents per share.
Now, not all IPOs go this way—I suspect there is a success story for every flop. However, I was interested to read a recent (29 October 2015) article by investment analyst, Matt Ryan, claiming ‘Dick Smith is the Greatest Private Equity Heist of All Time’, with its promise to turn a $10 million investment into a $520 million float within two years.
Now, there’s a Dick Smith store around the corner from my office that I often walk past and I have to say, it’s been mostly empty both pre- and post-listing. When I saw the initial IPO, I did scratch my head a little to wonder where the evidence of growth might be, as there certainly weren’t hordes of customers flowing through the doors to the store.
When considering investment into an IPO, there is a distinct disadvantage in the lack of historical data around the company, as it has largely been privately held. The offer document provides a glimpse but like any marketing material, it usually only displays the encouraging, positive numbers and might not show ‘the warts and headwinds’ of the investment, outside what it is legally required to do so.
Due to the limited financial information available, it is also difficult to judge how the management or the business might perform in less favourable environments. We always like to see how a company might fair not only in good times but also during, say, a recession, as cyclically it is inevitable there will be another one on the doorstep at some point. In many cases, this information is simply not available.
So next time you are shown the newest, hottest IPO splashed on the front page of the financial media, don’t get too caught up in the excitement and all the marketing spin that might go with the float.
Please also remember that before embarking on any investment decision, you should always seek professional guidance from a licensed financial planner. Of course, I recommend AJ Financial Planning.