Rat Race Running

IPOs or Initial Public Offerings is a process every publicly-listed company in the stock market has undergone, directly or indirectly (through a backdoor listing)

Private companies can raise capital for whatever purpose through an initial public offering by selling their shares to public investors. After that event, the private company becomes public.

Once the company is listed in the stock market, anyone who buys a share becomes a part-owner. You can read more about the stock market in this post. Now, let us proceed.

2021 had been a great year for the Philippine Stock Exchange in terms of initial public offerings. Ten additional companies were listed – 6 were regular companies, while 4 were Real Estate Investment Trusts (REITs).

I avoided buying newly listed companies in the past because Warren Buffett, one of the world’s best investors, said it was not a good idea for regular investors. However, in 2021, I tested my chance of buying and IPO investing.

With another ten new joiners in the pipeline this 2022, here are five things that I learned in 2021 which I hope could help you decide.

1. Money is not guaranteed.

The biggest misconception about IPOs, which can be dangerous, is that it is easy to earn money from them – a lesson I learned through a loss.

Initial public offerings, like any investment, can’t guarantee gains. So if someone tells you otherwise, they may be hyping the stock.

2. Know where they will use the fund.

The purpose of these public offerings is to raise capital, which will then be used to fund the company in various ways, including company expansion, debt repayment, asset acquisitions, etc.

Since IPOs are supposed to expand their business and offer more value to their shareholders, a huge chunk of their proceeds should be directed to expansion and acquisitions instead of the majority of their costs going to debt repayments. So observe where the listing company’s proceeds will go.

3. They can go very high on the first trading day.

This scenario is what buyers want to have, which does not happen very often. The offering price of $ALLDY was P0.60 per share, but it skyrocketed to P0.90 per share on its first day. 

The P0.30 increase is equivalent to 50% – the stock’s ceiling price (maximum price movement for a trading day).

The next day, it gapped up to P1.10 per share, or a 22.22% increase. However, before the day’s end, it dropped to -35.45% from the highs and closed at P0.71 per share.

So the investors who subscribed to the IPO price would have gained 83.33% in just two days. However, if they failed to sell, all their gains would have been wiped out after two months of trading.

4. They can go very low on the first trading day.

If you look at the previous example of Manny Villar’s AllDay ($ALLDY), though it went up by as much as 80% in just two days, it still went down eventually.

As of November 11, 2022, it is now more than -75% from its high of P1.10 per share.

Just as an IPO can skyrocket to its ceiling price on its first day, many didn’t think that it was also possible for an IPO to flop to its floor price.

In 2021, an IPO went to the floor and was dubbed one of the worst (if not the worst) IPOs in the Philippine Stock Exchange’s 100-year history.

The stock that managed to close below the market’s flooring price or -30% of the initial cost is Manny Villar’s brother Virgilio of Medilines Distributors Inc. ($MEDIC).

This company’s performance made me rethink the future IPOs in which I will participate.

Since $MEDIC’s IPO, it is now at P0.79 per share, or 65% below its IPO price of P2.30.

5. Read between the lines.

The biggest lesson many IPO investors learned from buying $MEDIC is the purpose of a stabilizing agent, which was supposed to defend the stock’s value from going down for a certain period.

Unlike Henry Sy, Jr.’s Synergy Grid and Development Philippines Inc. ($SGP) Follow-on Offering and Manny Villar’s AllDay Mart’s ($ALLDY), $MEDIC didn’t have a stabilizing agent. The stabilizing agent would have helped the company’s stock price from going where it went.

However, I also learned that a company could survive a heavy IPO sell-off without a stabilizing agent if the owner and underwriters would fight for it, like Millenial Billionaire Leandro Leviste and Abacus Capital did in Solar Philippines Nueva Ecija Corporation ($SPNEC). Maybe you just need the heart of your investors.

Another thing that investors should be careful of is following reports and hypes. Several business news sites reported oversubscriptions to $MEDIC, which prompted retail investors to buy. Unfortunately, it became a costly error.

It is also essential to watch interviews of the company executives and listen carefully for red flags.

Lastly, every company filing for an IPO has a prospectus posted on its website. Though it is usually very long, it won’t hurt to read the significant bits before subscribing to an IPO.

Final Thought:

Gains are not guaranteed in an IPO, so be careful if you subscribe to them. Make sure you do your due diligence and are not buying due to social media hype.

Also, names can’t guarantee a successful IPO. So, it is important to understand the business since you are investing in a business’s future growth as a trader and investor.

These lessons prompted me to refrain from buying IPOs and wait for the chart’s confirmation.

Happy trading, and God bless!

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This post is the first collaboration between my girlfriend and me.