Invest Without Emotions
Retail news outlets are once again gaga over phenomenal listing day returns of IPOs. Investors will do well to take a step back and take in the scene:
The code and data is on github.
We are not big fans of IPOs at StockViz (here, here). As an asset class, they are a bit like playing chutes-and-ladders. Even if you manage to roll into a few ladders, there are plenty of chutes that can take you down to zero.
To see if IPOs make sense as an investment, you should compare their returns to a broader index. On one hand, we have the S&P BSE IPO index that tracks the value of companies for two years after listing. And on the other, we have the BSE 100 index that tracks the top 100 stocks my market value. By comparing the returns of the two indices, we can get a fair idea of what we are getting into.
A buy-and-hold investor in the index at the beginning of 2005 would still be underwater after the bust of 2008. And to make matters worse, the BSE 100 index has trounced the IPO index.
| 8KMILES |
2014-01-29
|
+130.05%
|
| AGARIND |
2014-05-26
|
-45.53%
|
| AGRITECH |
2014-01-28
|
-79.37%
|
| ANKITMETAL |
2013-03-14
|
-65.29%
|
| ARCOTECH |
2014-04-16
|
+109.74%
|
| ATULAUTO |
2013-06-26
|
+277.10%
|
| BUTTERFLY |
2014-04-28
|
-12.57%
|
| CAPLIPOINT |
2014-06-23
|
+123.21%
|
| CASTROLIND |
2014-03-14
|
+19.52%
|
| CEREBRAINT |
2013-06-26
|
-61.25%
|
| CNOVAPETRO |
2014-01-01
|
-9.73%
|
| DUNCANSLTD |
2013-07-05
|
+16.70%
|
| FCEL |
2013-07-04
|
+38.17%
|
| FLFL |
2013-10-01
|
-35.45%
|
| GSCLCEMENT |
2013-05-15
|
+71.76%
|
| GULFCORP |
2014-06-26
|
-13.61%
|
| GULFOILLUB |
2014-07-31
|
+17.04%
|
| HATSUN |
2014-06-20
|
+10.28%
|
| IBULHSGFIN |
2013-07-23
|
+38.09%
|
| INTEGRA |
2013-08-20
|
-64.66%
|
| JPOLYINVST |
2013-11-11
|
+40.20%
|
| JUSTDIAL |
2013-06-05
|
+183.46%
|
| LYPSAGEMS |
2013-11-05
|
+1.31%
|
| MAKE |
2014-06-30
|
+72.51%
|
| MMWL |
2014-03-26
|
+56.67%
|
| MOHITIND |
2013-03-14
|
-38.16%
|
| NAKODA |
2013-03-14
|
-58.05%
|
| NATHBIOGEN |
2014-01-28
|
+632.86%
|
| NGCT |
2013-11-12
|
-32.08%
|
| NIBL |
2013-04-09
|
+214.95%
|
| ORBTEXP |
2013-11-05
|
+112.96%
|
| ORIENTCEM |
2013-07-12
|
+105.70%
|
| PFRL |
2013-07-17
|
-33.22%
|
| PILIND |
2013-10-07
|
+230.77%
|
| REPCOHOME |
2013-04-01
|
+172.19%
|
| SDBL |
2014-03-18
|
-13.60%
|
| SFCL |
2013-10-24
|
+72.90%
|
| SREEL |
2014-01-01
|
-11.07%
|
| SUJANATWR |
2013-09-11
|
+103.87%
|
| VIMALOIL |
2013-05-21
|
+75.39%
|
| VIVIDHA |
2013-05-21
|
-3.51%
|
| VMART |
2013-02-20
|
+91.39%
|
| WELENTRP |
2014-07-11
|
+221.25%
|
| WONDERLA |
2014-05-09
|
+80.04%
|
There have been twice as many winners as losers since 2013 and the chatter around the ‘IPO market heating up’ has been getting louder. However, investors would do well to keep the big picture in mind before jumping into that hot new IPO that their brokers are selling.
You can track the latest IPO news here.
We had come out with the StockViz 5-day rule for IPOs back in July-2012 which basically stated that “if it [the stock] doesn’t pop within the first 5 days, chances are that it never will.” And subsequent performance of IPOs have validated that rule.
Since August-2012, there have been 53 IPOs, of which only 2 have made any real money for investors over the long-term: JUSTDIAL and REPCOHOME. Here’s how the 5-,10-,20-,50-,100-,200-day average return for IPOs look like, juxtaposed on the NIFTYBEES ETF return:
The IPOs that made money were not slam-dunks either. Here’s a splattering of commentary on Just Dial:
There simply isn’t enough information about the company to evaluate whether the stock is a good investment or not at the time of the IPO. However, if you followed the rule, you would have cut your losses and retained the winners.
When it comes to investing in IPOs, remember the StockViz 5-day rule!
[stockquote]JUSTDIAL[/stockquote] [stockquote]REPCOHOME[/stockquote]
Warren Buffett had this to say about IPOs: “It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer(investors).”
How have Indian IPO investors fared lately? To answer this question, StockViz analyzed over 250 IPOs since 2010 and compared them to returns that an investor would get if he had bought the Nifty [stockquote]NIFTYBEES[/stockquote] or the Junior Nifty [stockquote]JUNIORBEES[/stockquote] ETFs instead. The headline: over 200 trading days, IPOs on an average tanked -20% while the ETFs were -0.1% and -4.5% over the same period. Obviously, performance varies depending on the scrip and IPOs, as a group, tend to exhibit volatile returns (a standard deviation, σ , of 0.66 vs. Nifty’s 0.12 for 200 day returns.) So much for “buy-and-hold.”
How did the “flippers” fare? The 5 and 10-day returns are not that much better either: +0.5% and –1.7% on an average, with the Nifty faring better in both the cases.
So why buy IPOs at all? If you look at the histograms, there are about 20-30 stocks that gave more than 30% returns. For example, Peria Karamalai [stockquote]PERIATEA[/stockquote] 200-day return is at 300%. Anecdotes about “friends-of-friends” making a killing in IPOs is a powerful motivation indeed.
Is there a way to play IPOs while managing downside risks at the same time? Turns out there is. If it’s a dog stock, you’ll know it before 5 days. Stocks that doubled 20-days from the day of listing exhibited an average return of 65% within the first 5 days. Stocks that doubled 50-days from the day of listing exhibited an average return of 50% within the first 5 days. The rule of thumb is: If it doesn’t pop within the first 5 days, chances are that it never will.
Follow the StockViz 5-day rule for IPOs and add that extra juice to your portfolio!
You can follow IPO related news by using your ipo smart tag: http://stockviz.biz/index.php/tag/ipo/
The spreadsheet analysis for this article is available on scribd.
2011 is definitely not turning out to be a year for IPO investors. IPOs have lost an average of 17% so far. The speed at which some of these have become penny stocks is truly amazing:
| Ticker | To-date performance |
| BGLOBAL | -85% |
| ACROPETAL | -85% |
| SHILPI | -84% |
| CORAL-HUB | -80% |
| SERVALL | -79% |
| BROOKS | -77% |
| SANGHVIFOR | -72% |
| TELEMARINE | -56% |
| SPYL | -56% |
| SRSLTD | -51% |
| DYNASYS | -50% |
Out of the 69 stocks that were analyzed, an opening day fizzle forebodes a dismal future for the stock: 48% of the IPOs had a down day on their first day and continue to perform poorly till date. 25% of the IPOs performed poorly in spite of spiking the first day – so there really is no magic forecasting too that can guide investors through the process.
I would take the side of Warren Buffett who once said:
It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors).
An IPO’ed stock just doesn’t have all the pieces of information that an astute investor considers before buying the stock. You cannot do technical analysis on a stock that has never traded, nor can you dig into its previous years’ balance-sheets to discover (or at least verify) strengths and weaknesses. It would be smart to check out the lead book-runner as well. If its some garage operation based out of Kalasipalya, then it would serve you well to stay away from the issue. For example: BGLOBAL, ACROPETAL, SHILPI, SERVALL were run by Almondz Global Securities, Saffron Capital Advisors, D&A Financial Services, Keynote Corporate Services respectively. The next time you see issues brought out by these guys, tread carefully!
Here’s the chart you’ve been waiting for:
