IPOs - are they worth it?

List of Stocks
shown further below

More Information

Wanting to utilise technical analysis to study the historical prices in order to take advantage of rising trends? Rather than participate in an IPO and hope that the price will rise? See more information about Technical Analysis.

Also...

Robert writes information from time to time about the market and investing. If you are not a Toolbox Member, you can register to receive useful free information as it is published. Click here to register interest For Email Marketing you can trust Privacy ensured, unsubscribe anytime. See the Testimonials - the things that people say about the Toolbox and more.

A personal experience

This particular analyst and commentator had a personal experience with an IPO in the early 1990s. With an interest in wine, and the pending float of Coldstream Hills winery (Yarra Valley), it seemed to be a good idea to participate and buy $500 worth of shares. If nothing else, it was thought to be a good experience at dabbling in the market.

Well, it was a fun experience to participate, and to be a real shareholder. But it was a total waste of money. The shares never went anywhere, and the company never paid a dividend. And the company was eventually swallowed up by a much larger wine making company (compulsorily acquired).

Financially? This experience was an important lesson. A $500 parcel was not a serious amount. Be prepared to lose some or all of the money. If we are truly serious about financial returns, the money can sometimes be better off in the bank (either in a bank account, or invested in a bank) - and this is NOT advice!

Research papers

1. McDonald and Fisher, 1991.
2. Logue, 1973; "On the pricing of unseasoned equity issues: 1965-1969", Journal of Financial and Quantitative Analysis 8.
3. Ibbotson, 1975; "Price performance of common stock new issues".
4. Ritter, 1984; "The 'hot issue' market of 1980".
5. Ibbotson, Sindelar and Ritter, 1988; "The Market's Problems with the Pricing of Initial Public Offerings" and another version.
6. Ritter, 1991; "The Long-Run Performance of Initial Public Offerings".
7. Ritter and Welch, 2002; "A Review of IPO Activity, Pricing, and Allocations".
8. Loughran and Ritter, 2002; "Why Has IPO Underpricing Changed Over Time?" and another version.
9. Santos, Francisco, 2010, "IPO underpricing and long-term underperformance".
10. Ahmed S. Alanazi and Benjamin Liu (Griffith Business School), 2013; "IPO financial and operating performance: Evidence from the six countries of the GCC".
11. Nurwati A. Admad-Zaluki; 2008; "Post-IPO Operating Performance and Earnings Management".

Skip this introductory text and go straight to the charts below
or click on the stock in the list at right.

Introduction

One way that retail investors can participate in the share market is to take part in a public float (an IPO - Initial Public Offering - or a subsequent new retail offer float after a re-organisation in the hands of a private equity company, for instance). Some of the higher profile floats of recent years include:- Telstra (with their T1, T2, and T3 offerings), Myer (2007), Asciano (AIO, 2007) and Dick Smith (2013). 

Some of the overseas high profile floats in recent years have included: Apple (AAPL in 1980), Google/Alphabet (2004), Amazon.com, Facebook (2012), Twitter, Chipotle Mexican Grill (NYSE:CMG, 2006), and the UK Royal Mail (2013). With floats like these, many investors were wondering how to get involved. It is so easy to get swept up in the hype that surrounds the initial share market listing of a high profile company - but will it be profitable or not?

With the GFC way behind us, and the credit cycle easing (in 2015-2016+) there is more company merger and acquisition activity, and there are more and more IPOs.

In late 2014 we saw the Medibank Private (MPL) float in late November and Estia Health Limited (EHE) and Godfreys Group Limited (GFY) in early December. They looked promising at the time, but were they successful?

Are we serious about increasing our wealth? or
are we happy to lend our investment capital
to a company so that they might never give it back?

A cursory review of IPO performance shows that for roughly half of Australian IPOs, the share price tends to be less than the listing price for at least several months after listing (this also applies to many overseas markets). One thing to watch for is the activity where some people participate in the float with the clear intention of selling into the hype within the first few days - for what is known as a stag profit. This sort of activity was hinted at in the first few days of the Asciano (AIO) float in 2007. 

Should we invest in a public float?

The material below includes some key discussion about IPOs, with some samples of high profile IPOs and their share price performance from recent years showing their price charts, with some being successful, and some not. You can skip this introductory text and go straight to the charts further below.

Upcoming and recent public floats

If you are really interested in the upcoming (Australian) IPOs, the ASX maintains a list on their official web site: www.asx.com.au/prices/upcoming.htm. Also see: www.investsmart.com.au/Floats/Upcoming.

How it works - the real reality

Exactly how does an Initial Public Offering (aka. public float) work?  Well, there are many good sources of this information on the internet, so we won't spend time on it here. What we will spend time on is what all the experts don't tell us about IPOs.

It is important to remember a couple of things about the IPO process. To participate in the IPO itself, we can complete the paperwork to buy a nominal number of shares, at a given price or at a price that is to be determined. When the time comes, we might, or we might not, receive the number of shares we requested. The share issue can be over-subscribed resulting in the number of shares issued to each investor being scaled back.

Then at some time later, the shares will commence trading on the open market, and on the first day of trading the share price might trade higher or lower than the issue price (ie. the original offer price). And in fact it might be a long way above or below the issue price. As time goes by, the share price could then go any where - up or down - and by significant amounts.

But how can the share price justifiably move up, or down?

To understand why these things happen, we need to remember that the traded share price on the open market is a reflection of the personal opinions of the market participants. Each of them might have done some calculations to estimate the real value of the shares; but it is only their opinion, which may differ markedly to everyone else's opinions. This is where some investors get carried away with their opinions about the company and their opinion about fair value for the shares. It is dangerous to our investment capital to become emotionally attached to any shares.

Now, what about instalment receipts (ie. partly paid shares)? In an IPO it is possible for the company to float their shares by asking for the share price to be paid in instalments. That is, to make an initial deposit, and pay the balance in one or more future instalments (which might, or might not, be optional payments). Telstra used this process, as did the Stadium Australia group (to build the Sydney Olympic Stadium - incorporated in 1996, floated in 1997, operated, then delisted as Stadium Australia Group (SAX) in 2007). Read a little news about this listing saga.

BrisConnections also used the instalment receipts process except that the instalment payments were NOT optional. This caused a big problem for BrisConnections investors because the trading price of the initial shares on the open market fell considerably, and they had the future payment obligation attached (unbeknown to many of the market participants).

Skip this introductory text and go straight to the charts below.

Why might we participate in a public float?

The average retail investor might want to participate in a public float (an IPO) for a number of reasons, such as:

1. To make a capital profit over a period of time (ie. an increase in share price, assuming it will increase).
2. To earn income from their (promised) dividend payments.
3. To express an interest in, or to support, a particular venture.
4. To be involved in the company and its dealings.
5. Because the investor genuinely wants to lend money to the organisation.

Should we participate in a public float or not?

The practising technical analyst who closely follows the share price charts would probably not participate in public floats, instead waiting to see a confirmed uptrend in the historical share price before risking hard-earned capital. If there is no price chart history - there is no price trend - so no investment - and minimal risk. 

Of course, this Share Market Toolbox web site contains no advice, and we should always defer to a properly qualified and licensed individual who might be able to advise in an unbiased manner as to whether an intended investment is suitable for our own personal circumstances.

In reality, taking up an offer in a public float is guessing and wishing!

We need to remember that when an IPO comes to market, there is an initial offer price set. And this offer price can be arrived at in a number of different ways, meaning that there will be a number of different possible float prices. This is possible because many assumptions need to be used in the pricing model, and it is very dependent on the estimates of forward earnings. One might expect that the offer price will be close to the intrinsic value (which can be argued is merely educated guesswork).

The final offer price can be influenced by a number of things. When the company managing the float approaches the institutional investors to seek their interest, if there is a lot of interest then the offer price can be pushed upwards as the different parties basically bid higher and higher prices in order to participate. However, if there is little interest, then the offer price can be somewhat subdued. (This is the basic economic principle of supply and demand.)

Then when the shares are floated and they start trading on the open market, the amount of real interest for those shares in the market place can push the share price higher, or a lack of interest will pull it lower. And this depends on a number of things such as the number of float participants who are keen to sell their allocated shares for whatever reason.

So, depending on a number of circumstances, the share price might go up or down after listing. And nobody will be able to accurately predict this in advance - that is, absolutely nobody can predict this, not your broker, nor adviser. So any participant who wants to see their investment capital improve will be simply hoping that it does. This is totally unlike using a structured discipline like technical analysis to identify a rising trend - remembering that a confirmed trend is likely to continue.

Skip the rest of this introductory text and
go straight to the charts below.

IPO performance - empirical studies

Over the years a number of empirical studies have been done to examine two key observations:- IPO under-pricing, and IPO long-term under-performance. The two consistent conclusions from the studies are that:

• Many IPOs are under priced. That is, the first few days of trading tend to be at prices higher than the issue price. Now this might be good for those who participate in the IPO, and then sell at some stage for a nice profit. But participating in the IPO is a gamble because the shares might trade below the issue price.
• Many IPOs under-perform both the market and their industry peers in the months following the IPO. In this case, it is clear that this is a good way to destroy investment capital.

For information about the research, see the links at right "Research papers".

IPO performance - actual results

Here are a number of research reports into the actual results of public floats over the years:

1. IPO Eye - An overview of 2014 (London).
   Download the report from EY.
   See more IPO reports and information from EY.com.
    
2. AVCAL - IPO performance analysis, 2003-2014 (min offer size A$100m).
   See the details and download the report from the AVCAL web site (or see the report here).
   (AVCAL - Australian Orivate Equity & Venture Capital Association Limited).
    
3. EY Global IPO Trends (2014 Q2).
   Download the report from EY.
   See more IPO reports and information from EY.com.
    
4. Pitcher Partners - Queensland IPO Study (November 2013)
   Download the report from Pitcher Partners.
   (See more download information from Pitcher Partners).
    
5. See a list of Recent IPO performances at 123jump.com.
    
   
6. Recent IPO performance on the Nasdaq - 5 Best/Worst IPO Performers in the 6 months.
    
   

By the way...

It has been quoted in the press (November 2013) that a wise broker once said the difference between a hand grenade and a company float is that the average investor has enough sense to throw the hand grenade away. (Source: www.afr.com, November 2013 - might require AFR login access).

Conclusion

Based on the evidence, the chances of an IPO returning positive capital growth in the short to medium term seem to be low (below 50 percent). It can be argued that to best protect investment capital one should seriously consider avoiding the IPO. For a personal experience, see the short story at right.

About the price charts below

The price charts below include a number of samples of IPO performance in the short term (soon after listing) and in the long term (over months or years). Of course, it is easy to suggest that these charts are a selective collection to support the argument. However, they are intended to demonstrate some real examples of what has happened in the past - whatever has happened before can happen again.

More information

For more information on this topic, see the list of references in the column above right...

Share price performance after the public float

Nuix Limited (NXL)

• Open: $8.50
• Low: $7.27
• High: $9.00
• Close: $8.01

* - A daily candlestick chart summarises the price action in each day.

Booktopia (BKG)

• Open: $2.86
• Low: $2.58
• High: $2.90
• Close: $2.72

* - A daily candlestick chart summarises the price action in each day.

HiPages (HPG)

• Open: $2.84
• Low: $2.46
• High: $2.55
• Close: $2.46

Firstly, note that the trading on day one (12 November) ranged from the open at $2.84 down to the close at $2.46, and the offer price was only one cent lower at $2.45. So there was no strong conviction that the shares were worth much more than the offer price.

Then for the rest of the first 4 weeks shown here, the share price has drifted lower (actually a downtrend), After the second week, any IPO participant was under water.

* - A daily candlestick chart summarises the price action for each day.

Aussie Broadband (ABB)

• Open: $1.73
• Low: $1.68
• High: $1.73
• Close: $1.68

* - A daily candlestick chart summarises the price action in each day.

CropLogic Limited (CLI)

• Open: $0.16
• Low: $0.14
• High: $0.175
• Close: $0.155

This daily* chart shows the first 14 days of trading and indicates the issue price at 20 cents near the top of the chart (a horizontal dashed line), then the first day of trading (the first candle) is a short-bodied candle with tails, well below the issue price.

Over the next few days of trading, the share price stayed roughly within the range of the first day, and ventured a little lower, but stayed above 13 cents (at least until 25th September). That is, the market participants were all believing that the stock was worth more than 13 cents (a support level).

The candle on 25th September has a longer lower tail that penetrates below the 13 cent support level, indicating that some market participants no longer believed the shares were worth more than 13 cents.

* - A daily candlestick chart summarises the price action for each day.

This daily* chart is similar to the first one at left (which shows 14 candles), but covers a period of more than 2 months. You can see the same first 14 daily candles at the left end of this chart.

Once the trading broke below the 13 cent support level, the trading continued for several days in a range mostly below 13 cents, with one exception on 2 October.

By mid-October the share price touched a low of about 10 cents, and then managed to trade above this level in the following weeks.

For the technical analysts who understand how to read the Volume bars (and the Trades and Value) in the lower window panes, there is more information to be gleaned about the opinions of the market participants.

The weekly* chart above shows the trading over the first four months. Remember that on a weekly candle chart, each candle summarises the price action in one week.

On this chart we can see that the price stayed above the 10 cent level until the week of 27 November. Across the rest of this chart the price tended to trade lower, and stayed below 10 cents from the week of 11 December.

* - A weekly candlestick chart summarises the price action for each week.

Afterpay (APT)

• Open: $2.70
• Low: $2.65
• High: $2.70
• Close: $2.70

* - A daily candlestick chart summarises the price action in each day.

Bingo Industries (BIN)

• Open: $1.73
• Low: $1.68
• High: $1.73
• Close: $1.68

* - A daily candlestick chart summarises the price action in each day.

Hot Copper (HOT)

• Open: $0.23
• Low: $0.225
• High: $0.27
• Close: $0.265

On day 1, in the first hour of trade (from 11am), the share price opened at 23c, above the issue price of 20c. For the rest of the day, in each hour, the price moved higher to close the day at 26.5cents.

Day 2 - High volume with a black candle as sellers took profits. Price stayed mostly above 24c during this day. Volumes mostly lower each hour, and the number of trades each hour below 20 (ie. max of one every three minutes, suggests not a lot of interest).

Day 3 - No trade in the first hour.

* - An hourly candlestick chart summarises the price action in each hourly period.

From day 2 onwards for 6 days, the trading was within the range of the first day, and progressively lower.

Trading on Monday 26 Sept fell below the previous trading range but stayed above a floor (a support level) of 21cents.

The overall price trend on this chart is down, with a Lower Peak on 30 Sept (the high of the daily candle), and a Lower Trough on 26, 27, and 28 Sept (the lows of the three candles). Read more about price trends.

On this chart we can now see a confirmed downtrend, with a sequence of lower peaks and lower troughs.

For about 5 weeks through December 2016 and into January 2017 the share price hovered around the IPO float price level of 20 cents, before continuing its movement lower.

Note the number of weekly trades in the bottom pane is less than 30 trades per week from mid-November onwards. Many traders look for more than 50 trades per day on average.

Wellard Limited (WLD)

• Open: $1.39
• Low: $1.31
• High: $1.39
• Close: $1.39

The first candlestick is very telling - it closed at the open price for the day ($1.39), but traded as low as $1.31 on rather high volume (compared to the following days). This candle is a Dragonfly candle, and shows the presence of sellers during the day who were over-powered by the weight of buyers.

However, over the next 5 trading days the share price made lower highs each day. Then for the next 11 trading days the share price was stuck in a narrow range between $1.39 (the float price) and a low of about $1.35 (a support level). Investors were not sure whether to support higher prices by buying more, or to sell.

The answer came on 6th January with trading below the $1.35 support level, on volume that was higher than most prior days.

We also notice on this chart that the daily volume and daily trades values were high enough to make this a liquid stock and able to be traded on the basis that a sell order would probably be filled quickly. (Read more at Stock Liquidity.)

* - A daily candlestick chart summarises the price action for each day.

After falling below the initial support level of $1.35 on 6th January, then next few candles are mostly Big Black ones, with a very bearish Big Black candle on very high volume on 11 January. The price settled at  the close on 12 January at $1.10 - this was the lowest level for the price for some time to come.

The share price then rallied through January to just under the float price, and again traded in a narrow range for 9 days, with a new support level at about $1.32. Then on 8th February it again fell below this support to sit above $1.13 - a new support level.

The price action described at left in the two daily charts is covered on the above weekly chart in just the first 11 candles. After that, the share price continued the fall that it started on 8th February, and paused the fall above 67 cents in early April. A red dotted line is drawn on the chart above the price action to indicate the confirmed downtrend (a sequence of lower peaks).

The astute technical analyst probably exited the position during this downtrend, because of the belief that a confirmed downtrend is likely to continue until it is confirmed to be over (refer one of the six tenets of Dow Theory).

For any investors who held on further, another sell-off took place over three weeks in May/June, and then another in August. There were plenty of opportunities to cut losses and close a position.

Phytotech Medical Limited (PYL)

• Open: $0.32
• Low: $0.305
• High: $0.42
• Close: $0.41

An hourly chart showing just the first two days of trading - a winner from day one

* - An hourly candlestick chart summarises the price action in each hourly period.

27 February 2015 update - This daily price chart (also showing volume in the middle pane and Trades in the lower pane) clearly shows the strong price run in the first 2 days of trading (up to about 80 cents), followed by the slump back below 30 cents by 9th February. For the rest of February, the price has traded within the range of about 31 to 43 cents. Still well up on the issue price.

10 June 2015 update - This latest price chart continues to show the small trading range, but at lower levels than back in February. Except for one price spike to 34 cents on 28 June, the price has traded within the range of 26.5 to 33 cents tops. This is still above the issue price, but any investor who has been holding on has missed out on other investment opportunities. Also note that the high daily volumes (and trades) of the first few weeks have now dissipated, and in fact the number of daily trades has fallen below the 50 per day level.

oOh!media Limited (OML)

• Open: $1.89
• Low: $1.80
• High: $1.90
• Close: $1.90

An hourly chart showing just the first 6 days of trading - below, then above, and below, the issue price.

* - An hourly candlestick chart summarises the price action in each hourly period.

9 January update - The share price has traded in a rather small range up to 5 percent above the issue price. We have now included in the Daily Trades in the lowest pane of the chart, and showing that it has been trading at less than 50 times per day on most days (which for some traders makes it illiquid - see more details about stock liquidity).

* - A daily candle chart summarises the price action each day.

June 2015 update - The share price initially went no where for a few weeks, and then shot up about 30 percent in the next month. Since early March it has mostly traded sideways until the short term run in early May, and has recently fallen away from that high. Nonetheless, it has been up, and is still up, about 30 percent from the issue price.

Godfreys Group Limited (GFY)

• Open: $2.88
• Low: $2.78
• High: $2.88
• Close: $2.85

Trading well above the float price from day one.

* - A 30 minute candle chart summarises the price action in each 30 minute period.

9 January update - The share price continued to trade in a very small range until early January when it took off to end up 16 percent higher on 9 January. We have now included in the Daily Trades in the lowest pane of the chart, and showing that it has been trading at less than 50 times per day (which for some traders makes it illiquid - see more details about stock liquidity).

* - A daily candle chart summarises the price action each day.

June 2015 update - An investor in this IPO could have sold their stock in early March for at least a 20 percent gain. Anyone who has held on until the latest date on this chart (9 June) would have seen the value stagnate for the last 3 months. Also, we can see in the bottom pane of the price chart "Trades" that the number of trades each day is below the 50 level, so that it's viability as a liquid and tradeable stock would have to be questioned.

Estia Health Limited (EHE)

• Open: $4.98
• Low: $4.71
• High: $4.99
• Close: $4.74

Trading well below the float price from day one, and after one week is about 18 percent below.

* - A 30 minute candle chart summarises the price action in each 30 minute period.

9 January update - The share price has continued to trade in a consistent range about 5 percent below the issue price. We are also showing the number of trades each day, with recent values between about 100 and 500, which makes this a liquid stock (for some traders - see more details about stock liquidity).

* - A daily candle chart summarises the price action each day.

June 2015 update - This stock has trended higher fairly consistently since the lows of December-January. It finally pushed above the issue price in February, and retreated back to sit on that price in April. Overall - it has not been very profitable yet.

Bapcor (BAP)

Medibank Private Limited (MPL)

• Open: $2.22
• Low: $2.14
• High: $2.23
• Close: $2.14

Trading above the retail float price, but hovering around the institutional price (hence some fund managers are not happy).

Trading in the first 3 days (at about $2.20) was above the institutional float price; but with black candles indicating a tendency to move lower.

* - A 10 minute candle chart summarises the price action in each 10 minute period.

9 January 2015 update - Since the last update below, the share price has moved higher to be about 20 percent above the (retail) offer price, and is also well in the money for the institutional investors.

26 December update - For the first two weeks of trading, the share price hovered around the $2.15 level - the institution's offer price. Then in the last hour of trading on 8th December, a larger number of shares traded hands, pushing the price above the recent trading range. After another week, the price has rallied strongly on the Christmas Eve trading half day (trading ends at 2pm on Christmas Eve).

* - A daily candle chart summarises the price action in each hour.

June 2015 update - MPL formed a Double Top pattern in February, and started trending down, and is now below the institutional issue price, and not much above the retail offer price.

Nine Entertainment Co (NEC)

• Open: $2.02
• Low: $1.975
• High: $2.07
• Close: $2.98

Veda Group Limited (VED)

• Open: $1.74
• Low: $1.63
• High: $1.78
• Close: $1.75

Dick Smith (DSH)

• Open: $2.28
• Low: $2.16
• High: $2.32
• Close: $2.20

NOTES:

With reference to the Chart DSH#4 at right, we note that after the share price had traded above a support level of about $1.92 for many months, the Big Black candle on high volume in August 2015 was the start of a final downtrend. 

The Downtrend line sitting above the share price on the chart appears to act as a ceiling above the price. By the time the company was delisted in December 2015, the share price had fallen 83 percent below its issue price two years earlier.

As often happens with falling share prices, this price chart provided ample opportunity for investors to see the writing on the wall, and to reduce or close a position and protect their investment capital from further downside.

NOTES:

The Dick Smith (DSH) share price moved either side of it's issue price in the first few weeks.

Daily volume rather high on the first day (normal for a float), but subsequently fell away.

NOTES:

This daily candle chart shows a confirmed down trend "channel" from the highs of January 2014. (The two channel lines are not parallel so perhaps this should really be called a falling flag pattern).

A Big Black candle on 19 February with much higher volume indicates an abundance of sellers wanting to exit their positions. In the following weeks the price rallied because enough buyers thought the price was a good value proposition (later proved to be wrong).

NOTES:

Basically, the share price in this period (December 2013 to July 2015) moved within a range above about $1.92. The highs of the highest candles were successively lower, suggesting that investors were not convinced the shares were worth any more than the issue price of $2.20.

Twitter (TWTR)

Freelancer Limited (FLN)

• Open $2.50
• Low: $1.42
• High: $2.60
• Close: $1.60

Sealink Travel Group (SLK)

OzForex (OFX)

iSelect (ISU)

Xero Limited (XRO)

QR National (QRN)

Facebook (FB)

NextDC (NXT)

Myer (MYR)

BrisConnections (BCS)

Asciano (AIO)

Boart Longyear (BLY)

AMP Limited (AMP)

Telstra Corporation (TLS)

• Float 1998
• Rising share price initially, then a long term downtrend.
• Downtrend until November 2010 with two more public offerings along the way.