The Daily Telegraph - Saturday - Money
When to risk investing in a market debut
Shares in Aston Martin slumped following the company’s debut on the London Stock Exchange last week. The luxury car maker priced its shares at £19, but after a brief rise to £19.15, the price fell by as much as 8.2pc. It ended its first day of trading 90p down at £18.10, a 4.7pc drop.
Retail investors are now free to trade the car brand’s shares at a discount to its initial public offering.
An initial public offering (IPO), or “flotation”, occurs when a private company becomes public, inviting institutional and retail investors to purchase a part of the business.
Buying stock at flotation allows investors to tap into a company’s growth as early as possible, and can result in huge returns in the long run. A person who bought shares in the chocolatier Hotel Chocolat when it floated in 2016, for example, would have seen a 79pc return on their investment in just over two years.
An investment in Facebook when the social media giant listed on the Nasdaq, the Japanese stock exchange, in 2012 would have grown by almost 300pc over the past six years. Those who bought shares in the drinks maker Fevertree have gained around 1,600pc since its first day of trading on the alternative investment market (Aim), in 2014 – although the tonic maker has lost its fizz this month, falling almost 25pc.
In contrast, over the past six years the overall total return of the FTSE 100 – an index of the country’s 100 largest companies – was 56.5pc, according to data tool FE Analytics.
However, buying into a business at IPO stage is no guarantee that your bet will pay off. Twitter, for example, has lost 35pc in value since its stock market debut in 2013. 13. And since the messaging app Snapchat pchat floated in March 2017, its shares es have fallen by 66pc. Along with Aston ston Martin, these companies join a long ng list of firms whose share prices have tumbled after opening themselves selves up to the public market.
So, what do retail investors need to look out for in an IPO – and how can they know when floundered. inv stockbrok Lansdow inves eas o e b th suc
On the other hand, when clothing retailer Boohoo made its first foray onto the Aim market in March 2014, its share price was 50p. The shares dwindled until they came close to their lowest price of around 25p in early 2015 – meaning those that waited to buy could then take advantage of a discount worth 50pc.
Despite the poor first year of trading, a person who had invested in Boohoo at IPO would still have benefited from a 207pc return – but some companies are worth avoiding altogether. Royal Mail’s high-profile flotation in 2013 may have made headlines, but eager investors have seen their investment drop in value by 24pc.
Jason Hollands of investment firm Tilney said people ought to be sceptical of IPOs and should be especially cautious of highlypublicised floats. “From a general viewpoint, it is worth considering why a company is coming to the market at a given point in time. Above all, one needs to balance the talk about the great opportunities ahead by asking the question ‘why
It can be tempting to rush into buying stock as soon as a company goes public, but patience is a virtue, finds Harry Brennan ‘Investors should approach flotations the same way as any investment decision’
now?’” he said. “If it looks like the main reason is to provide the founders or an existing cornerstone shareholder with an exit route while the IPO window is open, that might suggest they see uncertainty ahead and want to cash in while they can.”
Elaine Morgan of asset managers Kames Capital said there were three key things to consider before investing in an IPO.
First, the company should have a well established and competent management team that can weather the storm of the transition from private to public. They should also have their own wealth invested in the business, proving that their interests are aligned with those of shareholders. Having board members who have had experience at listed companies is also a good sign, she said.
Secondly, the business should have a proven model, with a clear idea of who its customers are and how it will grow. “I prefer businesses that have reached commercialisation, and where demand is mature enough to show trends, so I look for a large target market, with potential for high return on capital,” Ms Morgan said.
“Growth for companies is also easier where demand is supported by a positive environmental, social, technological or regulatory change, which is encouraging people to buy its product.”
Finally, you should be looking for conservative and realistic forecasts for profit and growth. Ultimately, she said, companies have to earn their valuations on the market.