BOURSE SECURITIES LIMITED
24th June, 2019
IPO Investing: Risky Business or Rewarding Strategy?
This week, we at Bourse consider one of the more exciting approaches to investing in international equity markets, Initial Public Offering (IPO) investing. Investors often employ one or more strategies when investing internationally, ranging from very-focused individual stocks to broad-based country, regional or even global Exchange Traded Funds (ETFs).
An IPO is the process where the shares of a privately owned company are offered for sale to the public and are listed on a stock exchange. Companies use the process of “going public” either as a means of raising additional funds to grow a business, or to generate cash for current shareholders who may be reducing their holdings in the particular stock (a liquidity event). As a local example, the IPO of Trinidad & Tobago NGL (TTNGL) in 2015 was a liquidity event where existing owners sold their shares.
Higher-risk investors sometimes engage in the strategy of IPO investing. Is this strategy worth considering, or should investors stick to more traditional approaches? We take a look at a few major IPOs in 2019 and consider the results of such a strategy.
The IPO investing Strategy
The IPO investing strategy is fairly straightforward: buy low, sell high. Investors buy a stock that has recently been listed (usually on the same day) with the sole purpose of ‘flipping’ the stock very shortly after. ‘Shortly after’ can vary, ranging from the same day the stock was bought to a few days after. Through an international trading platform like BourseTrader, investors can engage in this strategy (among many others) to potentially profit from newly-listed stocks.
How successful is the Strategy?
Let’s take a look at some of the winners and losers of the IPO strategy in 2019, on the assumptions that (i) investors purchased the stock immediately after listing on an exchange and (ii) sold the stock within one week of the purchase.
IPO Success Stories of 2019
Beyond Meat (BYND), Pinterest (PINS) and Fiverr (FVRR) are three of the more popular names which have enjoyed much success with their public offerings thus far. The performance of the plant-based food producer, Beyond Meat, has been particularly noteworthy since its debut. After being initially priced at US$25.00, the stock picked up 84% in pre-market gains, and a further 42.9% within the first official day of trading, overall advancing 163.0% above its IPO price. The share price of BYND has since sky-rocketed almost 235%, with its first post-IPO earnings report forecasting a doubling of revenue in 2019. Pinterest’s (PINS) first day of trading saw it rally 28.4% over its IPO price of US$19.00, and 2.7% over its opening price of US$23.75. After the first week, an investor who ‘flipped’ this stock would have realized a yield of 21.3% (from the opening price of US$23.75 per share). Odd-job online posting site Fiverr (FVRR), one of the most recent IPOs on the US exchange, debuted at US$21.00 and increased during pre-market trading to an opening price of US$26.00. The stock popped 53.5% by the close of the first day but pulled back a bit within the first week, rising 32.2% above its initial opening price.
IPO ‘Flops’ of 2019
One of the most anticipated IPOs of the year, Uber (UBER), shed 6.7% off its initial price of US$45.00 at the opening of trading, and closed with a 1.0% decline from the opening price (7.6% below the IPO price). The stock rebounded moderately to US$43.00 (2.4%) by the end of its first week, still lower than its IPO price. Similarly, ride-sharing giant Lyft (LYFT) also made its public debut earlier in the year at a price of US$72.00 While it opened 21.3% higher than its IPO price, it quickly gave up its gains, falling 10.4% by the close of trading. Lyft returned to its IPO price within a week after its listing and has since fallen 26.4% to US$64.26. Online pet supplies retailer, Chewy (CHWY), debuted just under two weeks ago at a price of US$22.00, but fell 2.8% below its opening price of US$36.00 to US$34.99 on its first day of trading. CHWY fell to US$34.23 (or 4.9% from its opening price) after one week.
For illustrative purposes, applying the IPO investing strategy to the stocks mentioned, and selling one week after the opening of trading would have resulted in an average gain of 15.1%. By comparison, an investor who bought the SPDR S&P 500 ETF (SPY) at the start of 2019 would have generated returns of 17.7%.
Strategy Considerations
While the excitement and allure of IPO investing can be strong, investors should consider several factors before employing this strategy:
- Stay Informed. Ultimately, you are paying for ownership in a company, regardless of how quickly you intend to sell. Ensure that you feel comfortable in owning the stock IF the price dips after the IPO. The prospectus of the company is usually an excellent source of information. A quick google search for news related to the company and a visit to its website can also be helpful.
- Be Disciplined. Set price targets for yourself on when you should exit the stock for both positive and negative returns. As is the case with more traditional strategies, the first loss is usually the best loss in IPO investing.
- Monitor your position. If you are buying into a stock for a short-term gain, you should be monitoring the stock as frequently as possible (typically several times a day). Otherwise, you put yourself at risk of missing out on an attractive exit point (either to lock in your profits or minimize your losses). Several free websites and smartphone apps provide live pricing data to help in this regard.
- Manage your expectations. Investors should understand that (i) there are risks to every investment strategy and (ii) the higher the potential returns, the higher the risk. Investor sentiment, company related news and geopolitical developments can all lead to stock prices swinging significantly, for better or worse. In many instances, companies pursuing IPOs tend to have very limited financial data and are often making losses when they go public. With all of these uncertainties, it’s no surprise that even the most seasoned and informed investors ‘take an L’ or call it wrong from time to time.
IPO investing can provide very attractive returns but carries with it a substantial level of risk. For many investors, their risk appetites may not be well-suited to such a strategy. Thankfully, there are many other approaches to investing in equity markets which appeal to a wide array of investors. Before diving actively into the world of IPO investing, it makes sense to consult with a trusted and experienced financial advisor, such as Bourse, to help determine if this strategy is suitable for you.
For more information on these and other investment themes, please contact Bourse Securities Limited, at 226-8773 or email us at invest@boursefinancial.com.
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