While IPOs in their literal sense mean that the company is for the first time issuing its stock to the general public, in reality whichever company is coming out with an offer to sell its share to the general public is known to go the IPO route. So that also includes company who already have their stock trading in the stock market.
Generally the investing community is excited about IPOs because traditionally it was thought that during its first offer companies sell their stock to the general public at a discount to their intrinsic value. While this was true for the Indian markets a few years ago one look at the IPOs coming out today tells us that this is not true anymore. Many companies who do not even have a financial history of five years or so, come out with IPOs to take advantage of the booming financial markets and therefore are not only ‘not’ selling their stock at a discount but even at outrageous prices.
There can be two kinds of investors for IPOs the long term investors who have bought the stock because they believe in the company and think that by holding the stock of the company for a long period they will be able to make profits. The other kind is the short term investors who just buy into the IPO to sell during the initial few days or even hours of listing and make what are known as listing gains.
While investing in IPOs investors should be careful about the history of the company because a lot of companies these days are just listing their shares out because they think that they can take advantage of the general optimism which prevails today in the markets.
The operational history can be a good judge and along with the pedigree of the promoters these two parameters can be a very good indicator of whether to invest in a stock or not.
After analysing the past performance of the company and making sure that the IPO is not being issued by fly by night operators, an investor needs to look at the price at which the IPO is being issued at and decide whether it is a fair price or not. While there is no fixed indicator for this the P/E Multiple provides a good yardstick and you can see what P/E is being demanded by the issuing company and whether it compares with the P/E that prevails in the industry. An important and often unnoticed thing about the P/E Multiple of IPOs is that it is calculated on the current number of shares that the company has got. However as soon as the IPO takes place most of the times fresh shares are issued in the market which will automatically push the P/E Multiple higher by pushing the EPS lower. So whatever P/E you are looking at, keep in mind that you will have to increase that by a bit most of the times after issue of stock.
These are a few tips to be taken care of while investing in IPOs so that you don’t end up burning your fingers.
