Stock Market Investing Reader Mail #4 – Should you invest in an IPO ? – Part 2
Last time in Part 1 of this two part series, we discussed what an IPO is and why you should not invest in an IPO. In this post, we are going to discuss why and when you should say “YES” to an Initial Public Offering (IPO)
1.) You should invest in an IPO when it is not overpriced
I know, I know, some stock market pundits calls an IPO as “It’s Probably Overpriced” instead of Initial Public Offering (IPO), because in most instances it is and I gave you two reasons why in Part 1 of this series. However there are certain instances when the IPO is under priced. Underwriters sometimes do this to generate more interest on a certain stock. Let me quote Wikipedia on this:
“Historically, some of IPOs both globally and in the United States have been underpriced. The effect of “initial underpricing” an IPO is to generate additional interest in the stock when it first becomes publicly traded. Through flipping, this can lead to significant gains for investors who have been allocated shares of the IPO at the offering price. However, underpricing an IPO results in “money left on the table”—lost capital that could have been raised for the company had the stock been offered at a higher price. One great example of all these factors at play was seen with theglobe.com IPO which helped fuel the IPO mania of the late 90′s internet era. Underwritten by Bear Stearns on November 13, 1998, the stock had been priced at $9 per share, and famously jumped 1000% at the opening of trading all the way up to $97, before deflating and closing at $63 after large sell offs from institutions flipping the stock. . . “
In instances when a stock is under priced, then its good to invest in an IPO ! Personally I have not encountered an under priced IPO in the Philippine stock market. But I have encountered an under priced Secondary Offering recently. (The issuance of new stock for public sale from a company that has already made its initial public offering (IPO)) San Miguel Corporation (SMC) whose book value is about P 90+ has recently made a secondary offering of only about P 110.00. Now that’s really cheap considering the price to book value and the prospects of the company!
2.) Study shows that you should invest in an IPO at the offering price but do not hold this for the long term
In the book “Stocks for the long run” Prof. Jeremy Siegel gives this advice for those investing in an IPO. “The lessons from studying the IPO market are clear. If you can get an IPO at the offering price, it is often a great buy. But don’t hold on! The subsequent performance almost always disappoints.” He makes this conclusion based on a study by Tim Loughran and Jay Ritter. According to their study those who bought IPOs at the market price on the first day of trading and held the stock for five years reaped only an average annual return 5 percent.
I decided to personally try out Prof. Siegel’s advice. I usually don’t buy in an IPO, I prefer to sit it out and wait until the market under prices the stock. But anyway, I decided to experiment. Airline Cebu Pacific (CEB) recently made a debut at the Philippine Stock Exchange so I bought at the IPO offering price of P 125.00. On its first trading day, the price went up to P 132 ! A gain of P 7.00 per share (5%) in just one day ! I thought of selling in the next two days thinking that the price will further go up. Unfortunately the price closed at 131 the next day then to 125 two days later. Taking my cue from Prof. Seigel, I decided to sell at 125.80 and 127.20 in the next few days True enough as Prof. Siegel said the “subsequent performance really disappointed”, because after 4 months, the price dropped to a low at 77.30 and until now it never went back to its IPO price.
So there you have it. Should you invest in an IPO ? The answer is both a YES and a NO. A NO in most instances, a YES with certain conditions. So get Best Offset Mortgages and decided whether you will invest in an IPO ! Have fun investing in stocks !
Hi ! my name is Zigfred Diaz, Thanks for visiting my blog where you can learn stock market investing the Warren Buffett way and using other value investing methods ! Never miss a post from this blog. Subscribe to my full feeds for free. Click here to subscribe to D’Intelligent Investor by Email
