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Analysing the hundreds of prospectuses that will appear in the coming months is beyond the means of 99% of the population who are generally time shy. Prospectuses are a marketing tool and whilst they are ASIC regulated sorting out what might be reality is a mighty challenge.
I recall so well two prospectus booms ago I would assiduously apply for prospectuses, attempt to understand the fine print, set aside my funds allowing others to gain interest on my capital whilst I parted with it for a month or more. Having gone to this bother then only to find out that I dipped out on an allocation or if I got an allocation it was so miserly it was hardly worth a cracker. I sometimes held on to the hard earned morsel parcel of shares only to watch them sometimes go off with a whimper on the ASX launch day. The real winners were, more often than not, those who had actually sold off their holdings to make the IPO happen and were now celebrating their new found wealth with copious bottles of Moet.
There is little doubt there is money to be made on IPOs but which ones? It is somewhat of a lucky dip. But I wonder now, unless you receive a firm allocation is it worth all the frenetic activity? Firm allocations are not so common these days as so many traders, particularly technical traders, use on-line brokers.
The dilemma for the pre-IPO shareholders is to price the issue correctly – a fine balancing act. They don’t want to give their shares away as often they have invested risk capital. So they want fair value but want to still make it attractive to the new shareholders who would expect say at least 10-15% stag profit. Valuers also have to look into a crystal ball and forecast what is the likely future climate of the markets some months ahead as it takes at least three months from decision, to float, to listing and more often closer to six months, so forecasting the equity climate at the time is no mean feat. Promina did not look an exciting IPO back in May last year – not massive stag profits at the time but has since built nice value as the overall equity environment turned positive.
If you are lucky enough to become an IPO shareholder how do you know when to walk away or when to throw back your cards. As a technical investor we are dependent on historical data and generally we need months of it if not years. So what tools can we use?
Volume comes into its own. We can use all sorts of variations – moving average on volume – not that I am a fan of moving averages but you can also use OBV which can offer some help even in the short term. I find market depth (micro volume if you like) most useful of all but even still it has shortcomings as a short term dip can be just that and it is a pause before the next move up. But volume is probably the only useful guide until at least a few months of data has been collected.
And to the markets – a very ordinary start to the year in Australia. The All Ords lost ground overall for the week and also for the month showing weakness on many fronts. But the overall trend up remains intact. But some stalwarts particularly in the materials sector look frail in the short term and could slide further as global demand for resources has softened and it appears that the dollar could well push through the $80c level eventually.
The Dow tottered a little last week but what a month in January – up 671 points! No nervousness there - not yet.
Welcome back to the team – a load off my shoulders – thank you for your interest in “Editorial Only” over the last month!
Tom Scollon
Editor
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