With stockmarket floats now becoming an almost-weekly event, investors are eager to beat the crowds and snap up new market entrants on the first day of dealings. While the majority of initial public offerings (IPO) have enjoyed significant rallies this year, we are slightly concerned about investors snapping up floats regardless of their fundamentals.
Many of the new IPOs won't have earnings forecasts in the market and may even lack historical earnings records. The admission document will provide that necessary information, yet we doubt that many retail investors spend time reading the finer details.
The mailbag at Shares' office is ever growing with reader requests for information on IPOs, showing the market appetite for new investment stories. Yet we'd hazard a guess that the mere company description is enough for many people to click the 'buy' button on their share dealing account.
When we flag upcoming floats on Twitter, we often receive comments from people asking if this stock is the next WANdisco (WAND:AIM), Blur (BLUR:AIM) or similar market success story. In a bull market, you'll probably get a few winners from picking similar sounding IPOs to existing stockmarket champions. Yet once the market loses steam, the best investors -- and ultimately the market -- will always return to the company's fundamentals and decide whether the shares are over or undervalued.
A classic example, in my opinion, of a stock waiting to collapse is Golden Saint Resources (GSR:AIM), a subject we discussed earlier this year in Shares. Investors have clearly been lured by the promise of shiny diamonds, yet this stock looks extremely overvalued when you delve deeper into the story. Its website has lots of pretty pictures and the company keeps talking about being an imminent producer -- but it is merely buying diamonds from other people with the intention of sending them to a third party for cutting and polishing. This paltry middle man situation arguably deserves one tenth of its current market valuation.
A higher profile float is Just Retirement (JRG) which joined the market yesterday after raising £343 million. As we flagged in a recent Shares story, the company wasn't a success the last time it was a listed business. And that situation seems to be recurring as it is now in its second consecutive day of big share price falls.
Just Retirement may be the stock that provides a stark reminder to the market that IPOs are not guaranteed easy-money investments. The business floated at 225p and it has since fallen by 12.8% to 196.25p after a mere two days on the market. This article from the Financial Times has an interesting quote from an undisclosed fund manager who express concerns about the state of the specialist annuity market and the advantage Just Retirement claims to have over mainstream rivals.
Another example is 24/7 Gaming (247:AIM). We spoke to the company after it joined the market in July and couldn't see why it commanded a £70 million valuation. The management couldn't answer many of our questions and we were left scratching our head as to why someone would want to invest.
To a bypasser, 24/7 Gaming may look a play on growing demand for mobile gaming. To us, it is a company that takes third party games already formatted for a mobile device and its job is to merely find customers. This is a highly-competitive market and it looks sub-scale to have a chance of succeeding. The shares have been a disaster, falling by a third since listing. You know company is absolutely desperate for attention when they issue a stockmarket announcement detailing 'Lee L' won a few thousand pounds on a game. Totally pointless.
We'll publish interesting data in tomorrow's issue of Shares that looks at how technology IPOs have performed. Tech is certainly a sector grabbing the headlines with the sheer number of new floats. It can be hard to value these companies as their cash burn is likely to be significant and profits entirely absent, yet companies with decent propositions can enjoy fast revenue growth and in time that could result in profits, so judging a stock on current fundamentals is not always straightforward.
Choosing the best shares is never easy, but we'll keep banging the drum that research is of paramount importance before you put money into any IPO. It can be easy to come up with a list of reasons to buy, particularly if the respective company has put on a good sales pitch. Now challenge yourself to write a list of reasons not to buy. Only then can you make a proper decision.