Despite warnings from market experts to be wary of IPO’s (Initial Public Offerings), many retail investors simply cannot resist the lure of getting in on the ground floor of something big. One factor making it easier for retail investors to throw caution to the wind is the outsized returns from some IPO’s.
However, the quoted leaps in the stock price use the issue price as a base number, not the opening trading price. In the past, few retail investors truly got in on the ground floor issue price. Those unwilling to wait buy in at what can be a much higher price.
A case in point is the one-time promising ASX entry OzForex (OFX) debuting on 11 October of 2013 with an opening price of $2.59. The stock hit a low of $2.55 for the day and closed at $2.34. Retail investors checking the financial news the following day saw reports of gains of 17%, based on the issue price of $2.00, a fact often ignored in the breathless reports of the stellar first day performance. However, impatient investors buying at the open lost 9.6% and those buying at the low price for the day, $2.53, lost 7.5%. The stock now trades around $2.46.
A recent entry into the growing number of “FinTech” stocks has the capability to change all that. Financial Technology companies are using software and digital platforms to disrupt traditional means of delivering financial services. Historically broking houses rely on lead brokers managing the IPO for allocations and then contact their own institutional and in some cases high net worth clients with the chance to get in on the offer.
In 2013 OnMarket Bookbuilds came on the scene with a digital bidding platform and a mobile app, available for companies to raise capital in a live open-bidding market, allowing retail investors access to the bidding process, free of charge. The process is in its infancy and could be hurt by the ASX move to change the regulatory requirements for listing with the intent of protecting unwary retail investors.
On 12 July OnMarket posted a Performance Report for IPO’s listing in the second quarter of 2016. The following chart from the report lists highlights for the quarter.
The statistics are impressive, but Bookbuilds also uses issue price on which to calculate returns. The best performing stock for its debut and for the quarter was seed producer Abundant Produce (ABT). The company specialises in vegetable seeds suitable for challenging growing conditions, such as throughout the Middle East. With an issue price of $0.20 and a first day close of $0.55 the one day return came in at an impressive 175%. The stock’s opening price, the low for the day, was $0.45, making the return for investors unable to get the issue price a healthy but far less impressive return of 22%. The share price closed the second quarter at $0.94 for a massive return on the issue price of 370% and a still stellar return of 108% for retail investors.
The second best performer was exploration and development minder Graphex Mining (GPX) with an issue price of $0.20; a first day trading opening at $0.33 on 14 June and closing at $0.37. The reported return as of the quarter close on 30 June was 160%, with a close at $0.52. The stock has dropped a bit since, now trading at $0.46, dropping the return based on the issue price to 130%.
The number three stock was Apply Direct (AD1), opening on 23 June at an issue price of $0.20. The stock began trading on 23 June, opening at $0.27 and closing at $0.31. The share price is now around $0.46. Apply Direct offers a digital recruitment and job search platform. Here is a comparison of these two stocks to date.
Graphex Mining serves as an example of one of the major reasons many experts recommend holding off on investing in IPO’s – what goes up quickly can come down just as fast. IPO’s can be and often are dramatically over-hyped, resulting in droves of investors jumping on for the ride with little or no research on the stock. When the fundamentals become suspect or the company fails to produce in rapid order, the share price suffers.
A classic example is one of 2015’s top performing IPO’s, Reffind Limited (RFN) which closed the trading year with its share price up 210%. The company qualified as a hot FinTech stock with a mobile platform allowing company’s quick communication capabilities with their employees. The share price remained hot until the fundamentals failed to live up to its high valuation, with reported revenues disappointing investors. Here is the price chart.
Reffind may yet recover as time and time again markets show that quality companies can recover. A notable case in point is online outsourcing company Freelancer.com (FLN). With massive market potential investors greedily drove the $0.50 issue price to an opening price of $2.50, with profit takers knocking the price down to $1.65 at the close.
The price performance chart demonstrates the reversal after a hot start.
However, the chart also serves as an example that in the long run quality companies produce quality returns. One of the most sought after IPO’s in 2014 was Medibank Private (MPL). Medibank was established by the federal government as a provider of private health insurance. The decision to turn Medibank Private into a public company included retail investors in the allocation, at a price of $2.00 per share, lower than the $2.15 paid by institutional investors. The share price fluttered a bit after a strong start but has done well for those who bought in. Here is the price chart for Medibank.
Ramsay Health Care (RHC) and CSL Limited (CSL) are two of the most successful companies trading on the ASX, and even these giants took some time to begin their dramatic rise in price. Here is a chart for the two since they began trading on the ASX back in 1997 (RHC) and 1994 (CSL).
For those with extremely high risk tolerance, getting in and out early sometimes works when the IPO takes few if any stutter steps out of the gate. An alternative strategy is to wait for the dust to settle and look for stocks with promising fundamentals over the long run.
Although the outstanding returns of the top three performers in Q2 of 2016 may continue, they are examples of stocks “priced to perfection”; meaning there is high risk of substantial downturns should the company’s performance fail to justify the high price of the stock. IPO’s whose share prices have lagged but operate in solid sectors with promise may provide better targets.
In the OnMarket Bookbuilds report, nine of the 21 stocks listing during Q2 closed the quarter flat or dropping in price. The biggest loser was medical imaging company Volpara Health Technologies Ltd (VHT). The company is New Zealand based, but went for a dual listing on the ASX. The stock began trading on the ASX on 27 April with both an opening and closing price of $0.50. The issue price was also $0.50 with the share price reaching a low of $0.35 in early July. It now trades at around $0.41.
The company has been in business for seven years and has four software products used in breast imaging centres for improved screening and early detection of breast cancer. According to the prospectus, Volpara has generated $5 million in revenue since it began, with 90% of that coming from the US market, where 40 million women per year undergo screening for breast cancer. The total number of breast cancer screens around the world approaches 75 million. The potential market for Volpara’s products is huge, with the occurrence of breast cancer forecasted to double by 2030.
Considering the potential market and the intellectual property patents on Volpara’s flagship software which has been subject to extensive clinical validation, it is somewhat surprising the share price has yet to take off. Volpara already has signed distribution deals with GE Healthcare and Siemens Medical Solutions USA, both manufacturers of imaging equipment.
However, investor reluctance may be attributable to the company’s shaky balance sheet and management’s reluctance to offer any future financial guidance in the IPO prospectus.
There is one other stock from the report that bears mentioning. ChimpChange ChimpChange Ltd (CCA) is Australia based with operating headquarters in California where the company first introduced its digital banking platform. Essentially, CCA uses a mobile application to operate like a bank without physical branches. In addition to general banking activities, the app allows customers to make payments and purchases anywhere MasterCard is accepted. It is the newest stock on the ASX, beginning trading on 29 June, opening at $0.60, 33% below its issue price of $0.80. The stock is now around $0.70.
The company elected to focus on the US market because of the ever-present fees the traditional banks tag on for just about every transaction they can think of. Here in Australia we can enter a Bank Code and transfer money free of charge. Not so in the US. In addition, interchange fees here are limited by caps set by the RBA, which is not the case in the States.
While the ChimpChange app certainly qualifies as disruptive technology, it is not the only game in town. The company has competition offering more features. ChimpChange plans to rollout new features within the next year to be more competitive. Some of these features include savings accounts, digital bill payment, personal budgeting tools, and cheque clearing. Surprising as it may seem cheques are still in common use in the US and consumers love the ability to take a picture of a cheque with their phones and digitally deposit it. For a fee ranging from 2% to 5% of the value of the check, consumers can have the cheque cleared and the funds ready for use within minutes.
On 11 July the launch of the mobile cheque clearing app sent the share price up from $0.54 to $0.67 and has continued to climb. CCA will remain a high risk speculative until the company’s increasing customer count begins to significantly impact revenue generation.