Why health float sank some banks

Published in the Daily Telegraph, April 2015 by Dale Gillham

Despite all the celebrations about the success of the Medibank Private (MPL) float, to me the real winners here, in the first 12 months, are the brokers who sold the shares to their clients — short-term profit-takers who exited a few weeks ago, and of course the government, which raised more than $5 billion from it.

So where does that leave you if you are holding the stock?

In the short term, the prognosis for investors is not good.

Reason being that statistics don’t lie, as at least 50 per cent of all floats fall below their offer price in the first 12 months.

You may be thinking that government floats, like MPL, are likely to be the exception, however even government floats tend to fall below their issue price in that time.

There has been at least one notable exception, being Telstra.

However, it may surprise you to learn that even companies such as the top 20 stock, Commonwealth Bank (CBA), fell away in its first 12 months of listing on the market.

That said, government floats generally tend to fairwell over the longer term, however, they also tend to be high-profile floats, which like Medibank, are surrounded by lots of marketing hype.

So inevitably, investors may end up paying too much in the float and later on the shares fall.

So what’s happened post- Medibank float?

It has been a wild ride.

MPL rose to a high of $2.59 in February, however last month it hit a low of $2.27, wiping out much of the gains.

While MPL is still above the investor issue price of $2, and may find support here for the next rise, it could also continue to decline.

What’s your plan?

Firstly, the point I am making is this: if the probability is high for you to be able to pick up shares post-float for less, is it really worth the risk to buy into the float?

Also, if you buy, via float, or on market, you ought to have a plan to manage risk.

So, what is your plan?

Some investors believe that putting shares in the bottom drawer is their plan. However, from a risk perspective, this is like trusting a boat on the open sea when you don’t know its condition.

It’s only when a storm hits that you realise there are holes in the boat.

And, what are you likely to do if you don’t have a plan? Cling to that boat until it goes under.

So, while your intention may be to hold MPL long term, many investors will not be prepared if the shares go into loss.

Given this, it’s important to document your answers to the following questions:

  1. What is an acceptable level of risk?
  2. How will I manage my risk?

Ideally, you ought to be asking these questions before you buy, and if you don’t know the answers don’t buy.

However, given that we are discussing MPL post-float, the time to answer is now, particularly as MPL has been falling, and as it is still trading above the issue price.

To further assist you in managing your Medibank Private shares:

  1. You could consider selling half of the shares to bank a profit. The lowest cost way is to set up an online broker account to sell them.
  2. Also, set a stop loss for your shares (based on your answers above). As a rule of thumb, I suggest a stop loss of no more than 15 per cent, being the maximum amount you are willing to lose if the shares fall below your purchase price.

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