IPO investing for dummies

For people familiar with the equities market, three letters—I-P-O—spell what is probably the Holy Grail of stock investing.

Indeed, the IPO [initial public offering] is one of the most exciting plays in the stock market for a number of reasons. And whenever companies announce plans to sell shares to the public, a fair amount of buzz is always created among the investing public.

Such is the case at present for stock investors in the Philippine Stock Exchange who expect a number of companies to “go public” over the next few weeks as they attempt to raise funds for their expansion plans.

But IPOs are not all that they promise to be. The truth of the matter is that one can lose just as well as gain in any IPO investment. So we asked some stock market experts for their advice to investors who are willing to brave the investment market and found out that—not surprisingly—the keys to making money were no secret at all.

Useful tips

According to BDO Capital president Ed Francisco, buyers should take a close look at the company selling shares before parting with their hard- earned money.

“The key is for investors to buy stocks that are leaders in their respective industries, with strong and sustainable financials,” he said.

More importantly, any IPO investor should discard the make-a-quick buck mentality when buying stocks of first-time corporate issuers.

“They should buy not on speculation with intention to sell immediately,” Francisco said. “They should buy stocks with the intention to keep them; stocks that will give them capital appreciation and dividends.”

Main targets

This was echoed by Campos Lanuza & Co. research head Jose Mari Lacson who said investors who were relying on fundamental analysis were the main targets of IPOs (as opposed to short-term traders who rely on trends to make a quick profit).

“IPOs are an investor’s product because fundamental analysis works best here,” he said. “Investors considering an IPO should pay close attention to the valuation estimate of the company.”

Is the issuer company offering the stock at a deep discount or at fair value? If it is being sold at a discount (to the perceived market value), the issuer wants investors to share in the upside potential of the IPO, Lacson explained.

“If it’s being offered at fair value, better buy from the market when it lists,” Lacson stressed.

Not on rumors

In the meantime, the chief investment officer of ING Investment Management’s Manila unit, Paul Joseph Garcia, conceded that investing in IPOs could be daunting for retail investors.

As such, they should do their homework by reading broker or independent research reports about the company they want to invest in.

“Never invest in IPOs on the basis of rumors. To be successful in investing, they should invest in companies with solid fundamentals, dominant position in their markets, professional management and good corporate governance,” Garcia said.

He noted that most companies selling stocks to the public would try to maximize their gains by pricing their shares at the high end of the range (market permitting, of course).

In situations like this, the stock price could drop below the IPO price, Garcia warned. To avoid getting stuck in such a situation, Garcia urged investors to look for companies which had “good stories to tell,” thus helping ensure that investors would not speculate or ‘flip’ the issue soon after the listing.

“GEMMS”

If all that advice is a bit difficult to chew on and remember, one veteran stockbroker has some very handy advice for retail stock investors.

One handy tool is what Citiseconline.com president Conrado Bate calls “GEMMS.”

According to the stockbroker, IPO investors should be guided one “simple filtering process.”

“The company should be in a Growth industry; Earnings should be predictable; Management must be ethical and show interest of shareholders, customers and employees; the company must have a Superior product or service; and lastly the company must have a Strong balance sheet,” Garcia said.

Of course, all this expert advice would be for naught if the investor lacks the most basic requirement for surviving and prospering in the rough and tumble world of the stock market: Common sense.

At the end of the day, a successful investment in an IPO has the same ingredients as any other enterprise: Don’t panic, and don’t be too greedy.

Happy hunting!