2021 was a record year for IPOs but are they profitable?

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According to a recent report from the ASX, 2021 was a record year for initial public offerings (IPOs), and we should expect another big year for company floats in 2022. I am often asked whether investing in a company float is a good idea and if you can make money from them.

There are two types of investors who flock to new listings, the first being those who wish to invest in a company in an area they like that has the potential for growth and, so, they buy for long term gains. There are also those who try to buy only to exit the stock immediately or very soon after it lists, as they attempt to pocket a quick profit. So, is investing in an IPO profitable?

In 2021 there were 240 new listings on the ASX raising $13 billion in capital with an average price performance of around 17% according to the ASX report. However, this is where the data can be misleading because while it is not mentioned, I believe the 17% gain is the difference in price between the subscription price of the IPO and the actual price quoted on the exchange when it lists. So, someone who subscribes to an IPO and then sells immediately upon listing would achieve that gain, on average. As we all know averages can be skewed, so it would be good to know how many of these 240 companies made a gain on listing and how they are doing now.

ipos

Looking at the top 10 IPOs in 2021, the largest of these was a Florida based asset manager, GQG Partners, who listed last October. After listing, the stock fell 31% to January 2022 and is currently down more than 15%. In fact, 50% the top 10 listings in 2021 are trading lower than the first price quoted on the ASX with one of the companies being a speculative mining company that is very illiquid with little to no trading on its shares.

While subscribing to a new company listing may be exciting and, at times, profitable, looking at the data it is much more hit and miss than most think and I would go as far as to say you need to be very selective. In fact, around 50% of the time you can buy into a company at a lower price than the listing price in the first 12 months. So it might pay to wait rather than speculate on a new IPO.

The best and worst performing sectors this week

The best performing sectors include Information Technology up more than 5% followed by Financials up more than 4% and Materials up more than 2. The worst performing sectors include Healthcare down more than 1% followed by Consumer Staples, which is just in the red and Communication Services, which is just in the green.

The best performers in the S&P/ASX top 100 stocks include AMP up more than 12% followed by Computershare up more than 10%, while CBA, S32 and Wisetech are all up more than 7%. The worst performing stocks include Mineral Resources down more than 5% followed by REA group down more than 2%, while Woolworths, Amcor and Coles are all down more than 2%.

What's next for the Australian share market

The All Ordinaries Index has been quite strong over the past two weeks rising nearly 7% in nine trading days. Given this strong move, many will be thinking that the recent down move is over, however, I would caution everyone to show a little patience.

While the market has risen over nine trading days, we can now expect a few down days, which may start today, Friday 11 February, and continue into early next week. How long and deep the fall is will tell us if the market is starting a new uptrend or whether we can expect more downside.

While I believe it is still possible that the All Ordinaries Index could fall below 7000 points and may fall to as low as 6800 points over the next few weeks, given the strong rise this week this is now less likely and the probability is swinging to the market being move bullish over the next few months.

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Dale Gillham is chief analyst for Wealth Within (AFSL 226347). He has an Advanced Diploma and Diploma of Share Trading and Investment and more than 25 years' experience in the financial services industry.

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