Every publicly-listed company in the stock market has at one point undergone an Initial Public Offering or IPO, whether directly or indirectly (through a backdoor listing).
Through an IPO, private companies can raise capital for whatever purpose by selling their shares to public investors. After the IPO, the private company becomes public.
Once the company is listed in the stock market, anyone who bought 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 IPOs. Ten additional companies were listed – 6 were regular companies, while 4 were Real Estate Investment Trusts (REITs).
In the past, I avoided buying IPOs because Warren Buffett, one of the world’s best investors, said that it is not a good idea for regular investors. However, in 2021, I tried my luck in buying IPOs.
With another ten IPOs 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 in an IPO.
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.
IPOs, like any investment, can’t guarantee gains. So if someone tells you otherwise, they may be just hyping the stock.
2. Know where they will use the fund.
The purpose of an IPO is to raise capital, which will then be used to fund the company in various ways like company expansion, debt repayment, asset acquisitions, and others.
Since IPOs are supposed to expand its business and offer more value to its shareholders, a huge chunk of its IPO proceeds should be directed to expansion and acquisitions, instead of majority of its costs going to debt repayments. So observe where the listing company’s IPO proceeds will go.
3. They can go very high on the first trading day.
This scenario is what IPO buyers want to have, which does not happen very often. The IPO price of $ALLDY was P0.60 per share, but it skyrocketed to P0.90 per share on its first day.
The P0.30 increase in its value is equivalent to 50% – the stock’s ceiling price (maximum price movement for a trading day).
The next day, it gapped up to P1.10 per share or a 22.22% increase. However, before the day’s end, it dropped to -35.45% from the highs and closed to P0.71 per share.
So for the investors who subscribed to the IPO price would have gained 83.33% in just two days. However, if they failed to sell, all their gains would have been wiped out after two months of trading.
4. They can go very low on the first trading day.
If you look at the previous example of Manny Villar’s AllDay ($ALLDY), though it went up by as much as 80% in just two days, it still went down eventually.
As of January 12, 2022, 70 days after its IPO, it is now -48.18% 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 as one of the worst (if not the worst) IPOs in the Philippine Stock Exchange’s 100-year history.
The stock which managed to close below the market’s flooring price or -30% of the initial cost is none other than Manny Villar’s brother Virgilio of Medilines Distributors Inc. ($MEDIC).
This IPO made me rethink the future IPOs that I will participate in.
In the first 34 days since $MEDIC’s IPO, it is now at P1.15 per share or 50% 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 for your investors.
Another thing that investors should be careful of is to follow 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 their website. Though it is usually very long, it won’t hurt to read the significant bits before thinking of subscribing to an IPO.
Gains are not guaranteed in an IPO, so be careful if ever you’ll subscribe to it. Make sure that 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 will just wait for confirmation in the chart.
Happy trading, and God bless!
This post is the first collaboration between my girlfriend and me.
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