ASX Study Announces Record Year for IPOs in 2021

According to a recent ASX report, 2021 was a record year for initial public offerings (IPOs), and we should expect another big year in 2022. As such, I am often asked what is an IPO, should I invest in an IPO and can I make money from investing in IPOs?

What is an IPO and should I invest?

In simple terms, an IPO is a public offering on a stock exchange in which the shares of a company are sold to institutional and retail investors. Typically there are two types of investors that flock to IPOs.

The first is those who wish to invest in a company 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 IPOs profitable?

In 2021 there were 240 new listings on the ASX raising $13 billion in capital with an average price performance of around 17 per cent according to the ASX report. However, this is where the data can be misleading because while it is not mentioned, I believe the 17 per cent 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.

Analysing the top IPOs in 2021

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 per cent to January 2022 and is currently down over 20 per cent. In fact, 50 per cent 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 per cent 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.

What were the best and worst performing sectors last week?

The best performing sectors included Financials up 4.01 per cent followed by Materials up 3.29 per cent and Information Technology up 1.81 per cent. The worst performing sectors included Healthcare down 3.09 per cent followed by Consumer Staples down 2.33 per cent and Communication Services down 1.24 per cent.

The best performers in the S&P/ASX top 100 stocks included Computershare up 11.11 per cent followed by Insurance Australia Group up 8.22 per cent and S32 up 7.54 per cent. The worst performing stocks included Mineral Resources down 8.43 per cent followed by AGL Energy down 7.32 per cent and Orora down 5.34 per cent.

What's next for the Australian share market? 

The All Ordinaries Index has been quite strong over the last two weeks rising nearly 7 per cent in nine trading days to Thursday 10 February. 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 expect a few down days this 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 7,000 points and may fall to as low as 6,800 points over the next few weeks, given the strong rise last week this is now less likely and the probability is swinging to the market being move bullish over the next few months.

For now, good luck and good trading. 

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.