Wheeling through the IPO Minefield


If you ever get involved in writing ‘stuff’ then you will probably recognise the quandary I often find myself in where I decide I want to get a Blog Draft written but I am not really sure what to write it about and although I have a long list of potential Blogs with high-level ‘outlines’, it is often the case that none of them really get me inspired. If there is such a lack of desire to put Fingers to Keyboard, then writing them can be a bit tedious and it probably doesn’t produce my best work (or even anything worth reading !!).

In the main I think I have been quite fortunate – possibly because I try to keep pressure off myself and I don’t do things like Charging for Website Access which would make me feel obliged to do stuff and it would be a bit too much like ‘Work’, and it is very rare that I write a Blog and actually find it tedious. In fact, the only one I can recall where this happened was that awful one on Hedging – I remember starting it with bold plans and then getting really bogged down and lacking any enthusiasm for it. In the end it just got released as an “over to you lot, I am so fed up with this” kind of thing and I know it wasn’t my finest hour…..(more like 60 hours was how it felt).

So, there I am this afternoon, desperately digging what hopefully will become a Sweetcorn Field (ok, not really a ‘Field’ as such, because I only have about 15 plants – and note the original Draft of this Blog was scribbled many months ago – it is too late to think you can shove some Green Giant Sweetcorn Nibblets in the ground now), once I have forked it about a bit and added some Horse Poo and in the back of my mind I am thinking that I need to do a Blog tonight. Now that could have involved just taking an existing Blog Draft and turning it into some sort of decent state where it could be published, or I could make a start on a new Blog idea.

I find during Week Nights I have a pretty tight time schedule and there is not really much time to relax and let the writing juices flow with regard to producing a new Blog Draft, and therefore on Week Nights I tend to just finish existing efforts off and to publish them (tonight I am being sponsored in this effort by a dose of Old Speckled Hen). With this in mind, I really wanted to start out on a fresh idea and although I have a long list of ideas, none were really all that interesting for me to write (that is not to say they won’t be interesting to write and for Readers to read in the future, I just didn’t really feel any great enthusiasm for writing about the ideas I had lined up).

I really was at a bit of a loss and was starting to think about finishing off that ‘Monkey with a Pin’ Series of Blogs that has been long promised, and for a far longer amount of time not delivered. Readers must really think this Monkey is some kind of mythical unicorn creature – but take it from me, the Blog Drafts do exist and at some point I will actually get round to issuing them (they finally did get published – check out the Archive).

I have no idea what triggered this idea, but all of a sudden I remembered sending out some Tweets months and months ago about how IPOs (Initial Public Offerings, otherwise know as Floatations, Floats or New Listings) tended to fall into two main categories – those that were already pre-existing real businesses and those where they were actually loss-making concepts and the people pushing the IPO were really using your Money to test out the concept. At the time I recall the Tweets getting a lot of comments and many people hitting the ‘favourite’ button (this was before the new-fangled ‘heart’ button) and it hit me this afternoon that this could actually form the basis for a Blog and it would be a useful piece of Educational spiel for the Website.

So here we go……..

Should we buy into IPOs?
There is a very common School of Thought (arguably not much thought if you ask me), that we should not buy into IPOs. The common misconception is that IPOs are being sold onto us gullible mugs on the Stockmarket because the Founders and Earlier Investors are realising their Investments and all the value has already been had. This seems particularly prevalent on IPOs from Private Equity Firms – the common response is that they are to be avoided (I suspect in reality PE Firms realise they have to leave some Value ‘on the table’ or otherwise they would never be able to get their IPOs away successfully – there has to be some upside. In addition, many of the superb IPOs I list later in this Blog originated from PE Firms). This really is just lazy thinking – the truth is that many IPOs make superb Buys for us Stockmarket Punters and we would be daft to miss out on these.

Yet again this is an example of Kahneman ‘Fast Thinking’ where a well known heuristic is being used to make a lazy snap judgement that all IPOs are bad – rather than doing some work on it and establishing the true situation and using our ‘Slow Brains’ (I am sure most Readers will have seen me bleat on about Daniel Kahneman’s work before, but if you want to know more then pop over to ‘Wheelie’s Bookshop’ where I have written a fairly long piece about his book ‘Thinking, Fast and Slow’ which is a tough read but by far the most outstanding Psychology Book I have ever read.)

Why can IPOs actually make very good Buys?
As we will come on to in due course, you need to be careful and selective, but if you take your time and think clearly, then you can often take advantage of some excellent new or recent Floats. There are many reasons why IPOs can work well, here are a few:

  • First off, you will have to trust me on this but my own experience and self-evident gains on many IPOs that I did not buy, tell me they can be real beauties. I am sure most Readers will have seen some stunning gains from IPOs – many of which I will mention later in this Blog.
  • Although all IPOs have a Broker (the likes of Numis, Cenkos, Zeus, Cannacord etc.), in reality I find that they don’t really get all that widely well known. Maybe amongst Institutional Investors (Fund Managers really) and People like myself who are Full Time on the Markets, the New IPOs are quite well known, but to the wider masses it seems they often take them by surprise and the New IPO stays ‘under the radar’ for quite a long time after it first appeared on the Market. I regularly see this on Tweets when a New Stock gets mentioned and nearly always someone says “oh, that’s a new one on me, what do they do?” or something of that ilk. Because these New Stocks are often not widely known, there is often considerable upside as the Market in general ‘wakes up’ to their existence and buys in – if we are in already, we can exploit this Informational Inefficiency.
  • Related to the Bullet Point above, New and Recent IPOs are often under-researched by Brokers and Analysts. I am not totally sure of the details on this, but there are some Stockmarket Rules (they are probably down to the FCA – Financial Conduct Authority) which seem to limit the availability of Analyst Reports prior to IPO and often they don’t appear to be allowed to cover a Stock until 6 months have passed since the IPO – in the meantime, there can be a lot of upside before the masses cotton on to the Story.
  • There is a very simple Technical Factor that helps New IPOs – because they have not been listed before, there is no Chart History to create natural Resistance Levels where Sellers would tend to come in (conversely, on the Downside there are no Support Levels sadly). This means that once an IPO Stock starts an Uptrend, it can keep on moving up quite nicely. Think of it like when a Stock breaks out of a Strong Horizontal Resistance Level and makes a New All Time High (ATH) – we should all know that in such situations there is nothing to hold the Stock back and the Price can rise sharply into the new ‘uncharted’ territory. Something I have noticed on many IPOs though is that they tend to do well for maybe 6 months to a year and then they break their Uptrend and fall back – I’m not sure what causes this, but it could be that as time goes on Holders and Potential Buyers start to worry that ‘Lock-in Periods’ of Directors and Previous Owners etc. tend to expire – thus causing a ‘Share Overhang’ – this is another IPO Phenomenon that can be taken advantage of.
  • Quite often New IPOs can be very fast growth businesses because they are starting Small – recent examples are FeverTree FEVR, Patisserie Valerie CAKE, AB Dynamics ABDP – these high growth rates from a Small Base mean that these kind of Stocks can command pretty high valuations – often a P/E of 30 or more (although of course, any slowdown and the Stock will get butchered). Needless to say, as such businesses mature and get much bigger, the Growth Rates tend to slow and the P/E Multiple tends to drop – just something to be aware of but the initial rise after IPO can be dramatic as I am sure you will have seen on the Stocks mentioned above (well done if you are holding these !!).

Spot the Difference
Here are some Big Winners that I hold after recent IPOs:

  • Safestyle SFE
  • Boohoo BOO (ok, this one got off to a false start but then perked up and luckily I had the Sense and Luck to Average Down)
  • Pets at Home PETS
  • Royal Mail RMG
  • Sprue Aegis SPRP (ok, it’s come off the boil now but there was huge upside for IPO buyers and just after – and I expect it to recover).
  • Cambria Automobiles CAMB (this listed about 7 years back but has just gone up and up).
  • Supergroup SGP (floated some years ago but has offered Buyers huge gains over that time – although like BOO it had a bit of a hiccup not long after the IPO). I still think there is plenty Upside here with patience after recent superb Trading Update.
  • Crest Nicholson CRST (I no longer hold these but bought just after IPO and made at least 80% on them).

Ones I expect to do well with a dose of WheeliePatience:

  • The AA AA. (this one gave initial buyers about 50% pretty quick and then fell back but I am pretty happy to hold it for the Divvy and Upside potential – it is one of the most well-known Brands in the UK).
  • Esure ESUR
  • Quantum Pharma QP. (this was a recent Buy that went a bit wrong for me – however, it is already on the Recovery Path and in time I expect this will deliver the goods – I recently Averaged Down on it after Mark Slater started buying in. On the downside, the CEO recently announced he is leaving which is a bit of a concern).
  • Empiric Student Property ESP (including the Divvys, I am already up about 10% which is not bad for a Tortoise Stock and I expect a lot more to come along with regular Income from the Divvys which I think will rise steadily over time).
  • McCarthy & Stone MCS (did well just after IPO but has fallen back – however, I see this as true long term quality and I will be looking to buy more on top of the Shares I bought on Thursday 28th July 2016).

One that didn’t do so well and I cocked up really was Glencore GLEN – not really sure what I was thinking when I bought this – although it was a few years ago and I did tend to dabble in Mining back in those days – I have since learnt my Lesson the painful way !! I still hold GLEN and it is slowly recovering, but it is not a high conviction play for me and it wouldn’t take much for me to dump it. I like having one of the Diversified Mining Majors but perhaps GLEN is not the best one (BLT or RIO might be better – although BLT has problems with the Samarco Mine Disaster) or maybe I should buy a Mining Fund like BRWM.

Some Stocks that did superb after IPO that sadly (boo hooo hoooo hoooo) I do not hold:

  • FEVR, CAKE, ABDP which I mentioned earlier
  • Wizz Air WIZZ
  • Manx Telecom MANX (I told everyone about this but stupidly did not buy myself !!)
  • Hotel Chocolat HOTC
  • Secure Trust Bank STB.

Here are a couple that I do not hold but look pretty good:

  • Accrol ACRL – discount bog rolls !!
  • XL Media XLM – I have said this is undervalued for ages and finally it is creeping up.
  • Focusrite TUNE – this looks an interesting business.

Now we come to a different category – these are ones that did terrible after IPO and were best avoided (luckily I did):

  • Flowgroup FLOW
  • Snoozebox ZZZ
  • Audioboom BOOM
  • RM2 International RM2 (dumbass name)
  • Blur BLUR
  • Tungsten TUNG (although as with many of these, sharp Traders after IPO could have made money going long provided they got out in time – most didn’t I suspect.)
  • Hostelworld HSW
  • There are also loads of Recent IPOs that have done very well for Buyers but are probably ‘Accidents waiting to happen’ – have a look at my WheelieBin page to see loads of these kind of things.

So what Simple Test can we use to separate out Good from Bad IPOs?
Finally we have got to the whole point of the Blog – in essence, the easy way to consider New IPOs is to identify if they are existing well-established Businesses that are selling things and preferably making a Profit and generating Cash (or if not, at least they have Sales and there is a clear path to Profitability and Losses are clearly reducing over the years) and Paying Dividends, or if they are ‘Blue Sky’ Concepts that existing Shareholders and Founders are using YOU to FUND with YOUR MONEY while they test out their theory and you can be sure that if the Concept turns out to be a success, then they get all the Upside and you have been stitched up with all the Risk.

However, even with proper businesses, make sure they have not been overloaded with Debt – this is often the real worry with regard to Stocks that have originated from Private Equity Firms.

So in simple terms, ask yourself if the New IPO is an:

  • Existing quality business with real Customers, Sales, Profits, Dividends and Growth, or
  • An untested Idea by some Fantasist who was unable to get proper backing from Venture Capital or other Funding and who is using YOU to FUND his Indulgent Experiment? (I deliberately said ‘his’ as I cannot remember any Ladies who have pulled the wool over Private Investors’ eyes in such a way – although there must be some). Think about it – if they cannot get anyone in the City to fund their insane idea (and not even a Dragon off the Den LOL), then it really can’t be too clever. This particularly applies to Miners and Biotech / Pharma – most of these are unproven crazy ideas – if they were any good, the Majors would have snapped them up.

Apply this test to any New IPO (or existing Stock on the Market for that matter) and you will quickly be able to rule out Junk that is likely to lose you Money and you can move on to looking at Proper Businesses.

Now get sniffing out them IPO Truffles !!

Cheers, WD.

Article written by @wheeliedealer

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