Thursday, 8 August 2013

Dabbling in IPO

The market has seen a flush of IPO recently, ranging from the very popular ones such as SPH REIT, to various industries such as Rex International (oil and gas exploration) and Money Max (Pawn house), to the small IPO listed on Catalist board such as ISO team. I guess the most headline-grabbing IPO belongs to the REITs, with one more coming up: Soilbuild Industrial REIT.

On an anecdotal level, I do hear from friends who work in the equity raising industry that business has been brisk this couple of months.

Personally, I never believe IPO is a good opportunity for stocks purchase. Company owners usually raise capital at a good price advantageous to the insiders, but of limited benefits to the retail investors. Why would the bosses want to sell the company shares to public when the market is bad and have difficulties fetching a good price?

Historical records also do not paint a good picture of the fate of company's shares post IPO. Majority of the time it goes south due to various reasons.

However, punting in IPO may not be a bad option for some quick bucks. A quick punt with IPO can bring in fairly substantial profits. Personally, my appropriate IPO punting opportunity for some pocket money must satisfy the following conditions:
  • Market is on a bull run
  • The company offering the share sales is an established, well-known company
  • The news of IPO has been circulating in the market for some time, generating good publicity in the lead-up to IPO
  • The IPO is priced at the high end of the indicative price range
Except for the last point, all criteria, if met, can be ascertained before the IPO takes place. The last point is usually made known few days before the opening of retail offer. And if its priced at the lower end of the price range, it usually means the IPO is not well-received.

These criteria are important because they serve as strong indicators that the IPO is popular with investors and is in high demand. This will usually guarantee a higher opening price. As IPO is a punting activity, I will prefer to punt on a high probability event. Satisfying the 4 points above signify a probable occurrence of first day profit.

What do I do with the shares should I get allocated? I will strictly adopt the habit of selling it off within the first 3 days. From my observations, should the IPO fulfill the 4 points, and open higher than IPO price on the first day, it usually has the momentum to rise further. I would like to catch the momentum to maximise profits, at the same time unwilling to hold onto speculations for extended period. Hence I will sell it within the first 3 days.

Then I will keep the profit and inject them into my coffers for other investment opportunities.

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