Manila, Philippines

Juan Liners: Buy or Ignore IPOs? It’s Like Your New Office Crush

Juan Liners: Buy or Ignore IPOs? It's Like Your New Office Crush
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NYSE: TWTR. Twitter debuted last year in the NYSE via its Initial Public Offering (IPO).

Up Up & Away #twtr by darinrmcclure, on Flickr
Listing price was at $26, and on opening day it reached as high as $50. Wow. Twitter valuations almost doubling on opening day.

Or maybe not. That’s the thing with IPOs. It is very tricky.

In general, companies list in PSE to gain access to public funds for its operations (ideally), especially if the market is doing well. Enlisting means taking the company from private to public (at least a part of it), allowing the public to own a piece of the company (tinee-winee piece for some). Other alternatives for company’s access to funds is getting a loan from banks or issuing bonds, both may be more expensive since the company will need to pay interest (and higher hierarchy in repayment in case of bankruptcy). In IPO, part ownership is given away by the company, but nonetheless, management and direction remains in their hands (and stock owners are among the last to be paid in case of bankruptcy, if there is anything left).

Do Your Homework
One really has to study the prospectus to gain a deeper understanding of how the price was set, how much is being sold to the public, and how the listing proceeds will be used. Hopefully not to turnaround an ailing company. Ideally, enlisting company is in growth mode. Remember the stock price on its own does not say anything. It has to be reconciled with how many shares have been listed to determine the company’s valuation.

Previously wrote something on IPOs, which I also call indeterminate price oscillations. And my sentiments remain the same after more than 2 years. As much as possible, I avoid IPOs. It is not for the faint of heart. Let’s just say IPOs, in general are more prone to speculation and hype and short-term trading compared to other stocks who have been listed in PSE for quite some time. Because they are new. They may be overvalued or undervalued for some. 

It’s like the scenario when there is a new-hire employee and quite an above average number of colleagues suddenly have a crush on him/her. Ahem ahem. Then eventually the number of admirers may slowly dwindle as they get to know the person more. Or it can go even higher if the crush proves to be of good substance and material. In time.

The Newbies
Locally, quite a number of  stocks debuted in PSE last year given the very positive sentiment especially during early 2013. These are: Philippine Business Bank (PSE: PBB), Asia United Bank (PSE: AUB), Del Monte Pacific Ltd (PSE: DMPL), AG Finance Inc (PSE: AGF), tugboat operator Harbor Star Shipping Services Inc. (PSE: TUGS), multi-format Robinsons Retail Holdings Inc (PSE: RRHI), yes related to Robinsons Malls., hotel and resort developer Travellers Hotel Group Inc (PSE: RWM), yes whisper Resorts World Manila, and retailer appliance maker Concepcion Industrial Corp. (PSE: CIC), sample is Condura. 

Some of these newly listed companies are quite unknown to the general public. While some are actually partially owned by already PSE-listed mother companies, so you see that makes valuation computations much more transparent (publicly available information) and yet much more muddled (both stock prices moving and possibility of double counting in the valuations). Thought you should know in case you want to speculate este investigate. And for 2014, looks like quite a number more are planning to enlist.

The More, The Merrier. More Funds, More Fun

Enlistment is not necessarily a bad thing. Other ASEAN countries have hundreds or thousands of listed companies for stock investors to choose from. So in the long run, this should be good for PSE (both market and PSE the company). But in the short run, the IPOs at times sap out liquidity causing short-term sell-offs and downtrends. Since there is limited money supply in the PSE (given very few stocks in the menu), some participants are forced to sell their holdings just to be able to participate in the IPO (which as we have seen can be much more exciting). But in the long run, I hope we see an increase in listed companies and in the money circulating in PSE.

John Mangun, in his article last year in BusinessMirror, also shared some tips when it comes to IPOs. Either avoid it totally, or if you decide to buy, sell once the price goes up. If most people think this way, then there’s really a chance that after the sudden spike, stock price will go back to original levels (profit-taking), or even 6-feet under. An interesting fact as well on PSE IPOs that he shared: 90% of the IPOs returned to original listing price within a month, after going down after listing. Care to validate?

If this is the case, would you like to join the mad rush, or wait for the dust to settle? Anyway, if it is really a good company with solid fundamentals, one can always wait for the stock to fly.

Here’s the link to Mangun’s article.


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