Good luck getting any shares in Medibank Private.
Fund managers have flocked to the health insurer’s initial public offer (IPO) like seagulls fighting over a box of chips. When the feeding frenzy finishes this week, the chip box will be empty.
The government will trumpet this as a triumph. Don’t swallow that lie.
Some players will reap big gains from this sale. But when we heard these four little words this week, alarm bells started to ring…
Think about what goes on inside a seagull’s brain. What drives it to muscle out dozens of its fellow birds in the pursuit of a lukewarm chip on the beach?
Free Reports:
It’s simple: fear of missing out. We call that FOMO.
The same fear drives investors to pay much more for shares than they should. It clouds the mind and makes you do things you know in your heart are wrong.
FOMO has driven more asset bubbles, panics and crashes than any other factor in the markets. Whether it’s tulip bulbs in 1630s Holland, tech stocks in 1990s California or subprime mortgage packages in 2000s New York, the psychology remains the same. For dubious reasons, the price of an asset rises — and how do investors respond? They flip out and bid prices higher.
FOMO is a great way of goosing stock prices higher — if you buy before the mania erupts. If you intercept that mood before it shifts, you can reap huge gains. But when ‘animal spirits’ drive up a stock price rather than solid fundamentals, it usually end in tears.
Medibank Private shares aren’t even tradeable yet. And if you applied for stock through the retail offer, you still don’t know how many shares the government will bestow upon you (spoiler alert: it won’t be many). But our sense is that investors’ attitudes toward Medibank Private have long since shifted to FOMO.
This week, the Medibank Private IPO process entered the final furlong — the institutional bookbuild. That’s the three-day auction where the government solicits the best final bid from each fund manager who wants to participate in the IPO.
But it’s not like auctioning a home. Bidders are in the dark as to how much others are bidding. And the government can coax stronger bids from the crowd by dropping not-so-subtle hints about what anonymous fund managers are willing to pay.
The government did just that this week. Finance Minister Mathias Cormann said that domestic and offshore institutional investors had shown ‘very strong demand’ for Medibank Private shares in the first 24 hours of the bookbuild. Sensing the seagulls surging, the government raised its indicative price range for fund managers to $2.00-$2.30 per share, from $1.55-$2.00.
The new price range could ascribe a value of as much as $6.3 billion to Medibank Private. That’s a monster windfall for the government. As we said earlier, they’ll crow about this as some sort of victory for everyday Aussies. But really, it just drops more cash into the government’s war chest to boost its own political capital. Don’t ever get between a politician and a dollar.
Here’s the good news for small-time investors: The government has graciously promised that successful retail subscribers won’t pay more than $2.00 per share. That means if the IPO prices above $2.00 and continues to trade up there, people who won the Medibank Private share ‘ballot’ will see an immediate paper profit.
But retail investors will get a tiny proportion of the ‘chips in the box’ — as few as 20%. And in case you missed it, these kinds of investors applied for a massive $12 billion worth of stock. That means the government will only allocate the average ‘successful’ Medibank Private punter a measly 10% of the shares for which they applied. As we said earlier — good luck getting any stock in this IPO.
All of these dynamics would be irrelevant if the stock offered great prospects of going up. We’ll admit the company has a solid business model. But every good idea has its price. That’s why we always remind readers of Australian Small-Cap Investigator to buy our stock tips only below our maximum recommended buy-up-to price.
The government has sold investors on the idea that Medibank Private is a cost-out story. But with the same management running this company for many years, we don’t see what might suddenly let them run a tighter ship. If lowering expenses is so easy, why haven’t they done it before?
It looks like FOMO frenzy will let the government price this IPO at close to 24 times Medibank Private’s forecasted profit for the year ending 30 Jun 2016. That’s an eye-wateringly high price-earnings ratio for a mature business, even a strong one.
Good luck with your paper profits if the government allocates you shares in this sale…but beware the expensive stock in a fear-driven market. Once the seagull squabble subsides, the Medibank Private stock price could run out of support.
Cheers,
Tim Dohrmann,
Editor, Money Morning
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