With new companies joining the market at an accelerated pace, is it wise to rush and buy new IPOs (initial public offerings) on their first day of trading? We've run the numbers on the market and the performance figures aren't as good as we expected. On the whole, few IPOs so far this year have generated a positive return when you look at the prices at which retail investors have actually been able to buy shares.
(Click on the table to enlarge)
Most IPOs have started trading at a handsome premium to the price at which they raised new money – known as the IPO placing price. With the exception of Pets at Home (PETS), all IPOs so far in 2014 have been restricted to institutional investors. They are the ones sitting on decent returns. The first chance for retail investors to buy stock is once the shares start trading. That's why the first day open price in our table is more relevant than the IPO price.
As you can see, most IPOs started trading at a higher level than their first day's closing price. Anyone buying big names splashed across the press like AO World (AO.) immediately upon listing would have actually lost money so far. The electrical goods seller's shares opened 33% above its IPO placing price, netting a fantastic gain for all the fund managers and banks that agreed to take stock ahead of the flotation. Yet the shares closed 2p below their open price and have since fallen further – so there's probably a high chance that any retailer who bought amid the initial frenzy is in negative territory.
Today sees XLMedia's (XLM:AIM) market debut. We've written about the investment case in the latest issue of Shares and anticipated a strong performance on day one – it is so far up 21% on the IPO placing price. Time will tell if retail investors can make money, but anyone buying today won't have made a profit yet, as the shares have barely moved from their initial opening price.
As with all IPOs, it pays to thoroughly research the business before rushing to buy stock. We've warned about snapping up the latest shares in the past and repeat that warning today. It is always exciting to see new companies join the market, but treat them the same way you would for any existing stock. What's the business proposition? What's unique about the products or services? How much cash will it need to achieve business goals? What's the competition? There's plenty more questions to ask. Indeed, we published a checklist to follow earlier this year for new market entrants.
We're not anti-IPOs, we simply want investors to take their time when choosing stocks. Indeed, there are examples of companies where you could have bought on day one and enjoyed subsequent capital appreciation. For example, Actual Experience (ACT:AIM) started at 110p and more than doubled in price by the market close – albeit now trading well below this level. Retail investors could be sitting on a near-10% gain in Poundland (PLND) if they bought at the market open. We like pallet maker RM2 (RM2:AIM) but its failure to communicate with investors has left the share price drifting.
To keep up-to-date with all the latest IPO news, keep visiting the IPO section on our website which lists all forthcoming, rumoured and recent market entrants.