Short-term profit-takers are impacting the IPO market, says expert
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IPOs should be seen as long-term investments, not just vehicles for a quick profit, says Stuart McClure, chief executive officer of Vested Equities.
What is your view of the IPO market at the moment?
Approach to IPOs has changed dramatically recently and there has emerged a huge churn and burn mentality. Good companies making good money can get really beaten up in the market.
We’re seeing everyday investors lured by the promise of quick money – they buy into an IPO until it gets up and running and then milk the company while there’s a buzz.
A lot of good companies have come out with great reports and exceeded what they said they would do, they are tracking along nicely but have fallen out because investors have clocked out.
Instead of asking about the credentials of the company and its merits, all of a sudden we have retail clients asking about what aftermarket support is lined up or how much of the investment is institutions versus retail.
It makes IPOs so much harder for everyone else and really defeats the purpose.
We see IPOs as a long term investment. On the contrary, a lot of these quick investors are in it just for a good profit.
What is causing investor sentiment towards IPOs?
I think it has something to do with the availability and the marketing of IPOs – there has been a lot of news about the success of various floats and at the moment people are willing to take the risk.
News stories focus on how much IPOs have moved in their first 100 days and people are buying into the hype and I think the ASX has a role to play. They need to be more stringent on who they allow to list because at the end of the day these small companies are high risk for retail investors.
The number of IPOs have increased substantially – it’s a good thing for the people making money out of it but I think it is to the detriment of some good companies.
Can you give an example?
Tesserent (ASX:TNT) listed over a year ago and has consistently underperformed since that point. It is now trading with a $2.8 million market cap – an amount that really should not be market-listed. Even at its initial float the company only had a $15 million market cap – those companies should be looking elsewhere rather than the ASX.
I feel that there is only a certain amount of capital to go around – particularly in the retail spread – if you have more IPOs then you see money going out of one to support another.
It becomes a supply and demand scenario rather than investment on a company’s own merits
I think there is a lot to be said for seed capital and raising money outside of the ASX. Whether seed capital or access to debt facilities – there are other options available.
If you are a good quality company then the market should be able to recognise that in the private space.
Is there a way back for companies once investors tap out?
It does take a long time for shares to rally back.
China Dairy Corp (ASX:CDC) met the same fate on their float. They listed well below cash value, with $76 million in cash on their balance sheet and a market cap of $50 million and their share price fell 50 per cent after listing.
In the market they are an absolute disaster despite their profits growing. It frustrates me to watch good companies go bad because of people looking for a quick buck.
Until things change, as a company we will have less to do in the IPO space – you don’t want to get stuck talking about a great company but a terrible share price.
Stuart McClure is the co-founder of Vested Equities which provides financial advice to retail and wholesale clients across a range of products including stocks, bonds, property trusts, exchange traded and managed funds commodities and derivatives.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.