Another day dawns. The stock market opens for business — but don’t be surprised if today brings a quiet trading session.
The city of Melbourne has hung up the ‘out of office’ sign in honour of a horse race. Collins Street is deserted and the Members’ Enclosure at Flemington Racecourse will be bumping.
Public holidays are a great time to sift through your ‘to do’ list. We often find it’s a rare chance to take stock of potential investments.
One piece sitting in your in-tray deserves special attention.
But it’s not for the reasons you might suspect…
Free Reports:
We’re sure you’ve heard the news.
In case you missed our piece about Medibank Private on Thursday, the Australian government is selling its health insurance company. It will float on the Australian Securities Exchange (ASX) later this month through an initial public offer (IPO).
You might be one of the 750,000 Aussies who pre-registered to receive the Medibank Private share offer prospectus. If that’s you, today might present your first chance to consider the offer.
The glossy brochure might wow you. But IPOs are not necessarily the rolled-gold opportunities that their spruikers would have you believe.
We showed you what we thought of this deal last week. The way we see it, the price is on the nose.
That’s the final word when it comes to IPO investing — or, for that matter, any type of investing.
A company might benefit from the most profitable trends in history. But if somebody — in this case, the Australian government — sucks you into paying too much for the stock, you’ll lose money.
Paying over the odds is always a danger in deals like this. That’s because companies only bother listing on the ASX when the broker can assure the vendor of a nice high sale price.
Sentiment in the Aussie stock market has been good enough over the past year and a half to entice dozens of companies to join the ASX list.
In fact, since the ‘IPO window’ burst open as Australia’s equity capital markets roared back to life in early 2013, more than 90 formerly private companies have listed.
That includes ‘reverse IPOs’, of which there have been several this year. A reverse IPO happens when a private firm lists on the ASX by merging with a listed shell company.
You won’t see reverse IPOs included on most lists of floats. But just as a reminder, we showed you how you could benefit from reverse IPOs in this article back in May.
Anyway, we thought a public holiday as good a time as any to review how these new faces have performed since listing.
It probably won’t surprise you to hear that those 90 stocks have put in mixed performances. Most are up…but many are down.
Some have provided sensational, if erratic, returns. Indoor Skydive Australia Group Ltd [ASX:IDZ] is up 180% since listing in January 2013.
That being said, timing is everything with this stock. IPO investors who sold IDZ after 14 months would have bagged gains of as much as 325%…but if you were on the other side of that trade in March, you’d now be face-to-face with a 34% loss.
That alone should show you that IPO investment is a risky game. You should only invest money in these kinds of companies that you can afford to lose.
Some new stocks have gone from strength to strength. For example, since listing 18 months ago, law firm Shine Corporate Ltd [ASX:SHJ] has steadily risen to show IPO investors a 160% gain.
But others have dropped like a stone and are yet to recover. One of the worst culprits has been New South Wales coking coal developer Malabar Coal Ltd [ASX:MBC]. Since listing in March 2013, Malabar has scarcely traded anywhere near its $1.00 offer price. At last count, the stock was down 88%.
Here’s why some IPOs grow in leaps and bounds and others stagnate.
From the newest listing to the oldest veteran, most of the performance of any stock comes from two elements.
The first is the price you pay for the stock. We’ve shown you why that factor alone has turned us off the Medibank Private float.
The other is the attractiveness of the industry the company plays in.
Much like how a rising tide lifts all boats, a growing market tends to boost stocks across a sector.
And the sectors that provided the market darlings of the past 18 months will not necessarily yield such rich pickings into 2015.
That’s why right now, we’re warming up on resource stocks.
No matter how tough the market may be, some resource stocks can still go up. Those moves are usually due to big news on the financial newswires — like a resource upgrade or new discovery.
The best time to punt on resource stocks to get the biggest bang for your buck isn’t necessarily during a bull market or in the middle of a bear market.
The best time is when most people have given up on resource stocks.
That’s also when you can identify the beginning of a new trend.
Put those two factors together and it spells a great opportunity for speculators to get into the market before the next resources bull market rally begins.
As always with small-cap resource plays, there’s no guarantee these bets will pay off. But there has never been a better time to take that chance. Go here to find out how you can stake your claim.
Cheers,
Tim Dohrmann+
Editor, Money Morning
From the Port Phillip Publishing Library
Special Report: Return of the Wildcatters: One area off the coast of the Philippines contains up to 380 million barrels of oil. A hardened team of Aussie drillers holds exclusive rights to extract it…and they’re going for every last drop.
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