How to invest in IPO and not to lose

How to understand whether a successful IPO or investors deprived of shares? Although a universal formula for success is, there are a number of criteria specific to “hot” locations.

1. Branch of the company. An important determinant is the sector of the market in which the company operates. For example, placement in fast-growing technology and innovation sectors to attract more attention of investors than IPO companies from traditional industries.

In the list of the most anticipated offerings of 2018 is mainly featured companies related to Internet technology, electronic trade, production of smartphones, as well as biotechnologies and genetic engineering.

Как вложиться в IPO и не прогадать

Why preference is given to enterprises in the business model which the layman can hardly understand? The reason partly lies in the growth potential of the company.

2. The potential for growth and successful business model. Investors appreciate companies with long term growth potential and are even willing to forgive losses and negative net cash flow (FCF) in the current periods. The main reason for this condescending attitude is the confidence of investors in the success of the business model of the company, times the revenue growth in the future and the outlet of the Issuer at a certain level of operating margin and ROCE.

The combination of these factors, in theory, must make the investments in high-yield investment multiple of increasing the capitalization of the company. As example is the recent successful placement: Xiaomi in the second quarter of 2018 has recorded revenue growth of 68%, and PinDuoDuo in the last reporting period — 2489% year-on-year.

Very few companies can demonstrate anything like comparable results. Despite the fact that stocks of Internet and technology companies are often quite volatile (worth a look if only for Tesla or PinDuoDuo), investors assume the risk, hoping eventually to get a significant profit.

3. The reputation and fame of the company. Often the loudest placement is carried out by companies that are “heard” by consumers. And it is justified. Investing in the IPO of the company, which has no history of trades (borrowing in the form of bonds), and often public statements, investors largely have to trust the management forecasts and the Bank’s consultants.

Much easier to do if a private company is already quite known to the General public, not to be tried in a bad light in the press, not had a high-profile legal proceedings and which is headed by a dependable and trustworthy top management.

Also an important factor for the success of the placement is the presence of a well-known anchor investors. If the list of funds that participated in rounds of venture financing prior to the IPO, there are names such as Sequoia, Tencent, or Tigers, investors perceive it as a distinctive mark of quality that supports confidence in the success of the placement.

4. Placement. Statistics show that posting on the U.S. exchanges are more successful in first day of trading (78% of new IPO in the United States show a positive trend in the first day, while on the Hong Kong stock exchange — 57%).

It is no coincidence because the us stock market is very liquid, has the most developed infrastructure, effective regulation and the largest number of institutional and private investors. In other words, in the US, most of the investors ‘ money and over the years developed trust in the institutions of the stock market. It should be noted that the difference in the dynamics of the shares placed in new York and, say, in Hong Kong, virtually disappears on the horizon of 12 months.

5. The work of the organizers of the IPO. An important indicator of the efficiency of investment banks is the so-called oversubscription books location — the excess of demand over supply of shares. It is a good indicator of the success of the coming IPO.

However, it is important to remember that slight oversubscription is not necessarily an indicator of a “failed” placement, and the stock may show good growth even if the demand from the institutional market participants at the time of formation of the order book was relatively low.

Often, the positive dynamics of shares to provide private investors who buy securities after the start of trading and draw investment ideas from specialized online resources and social networking. So the positive information background on the Internet also becomes one of the success factors.

Quite often in “hot” offerings, the demand exceeds the offer in tens times. And while this is a sign of the success of the placement, the reverse side of this factor is a very small allocation of securities among investors.

Often, when the oversubscription is more than 20 times the allocation of investors does not exceed 2-5% of the declared demand — regardless of the weight and reputation subscriber. That is actually to obtain a high allocation to participate in the hottest IPOs, investors have little chance. In addition, as a rule, in an IPO are able to participate only to institutional investors and only a very rare exception — private.

It is important to note that in less hot locations, the dynamics of the stock after the IPO are less predictable. In addition to purely market forces it will be subject to further investor interest in the company after the placement.

Shares immediately after the IPO, often show increased volatility, largely due to the lack of broad market consensus from paper-beginners. Market consensus is usually formed later — after the stock will get an official public recommendations from major brokers (usually 30-60 days after placement) or after one or two reporting periods.