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The trick of trading IPOs

Michael Taylor explains how frothy IPOs can offer great opportunities for switched-on traders
The trick of trading IPOs

 

  • London's potential for IPO boom could offer nimble traders opportunities
  • But be aware of froth 
  • Keep an eye out for a trading opportunity at an advertising and marketing specialist

It is a year since this column began. Time flies, doesn’t it? This time last year we were a few weeks away from complete lockdown – not that we knew it at the time. And one year on, we’re still in complete lockdown, even though over 20 million people have had their first vaccine dose and the rolling 7-day average death count is now closing in on going below 200.

I have long learned that it makes no sense to try to make sense of the inexplicable.

That is now what also seems to be happening in the stock market. Rather than just pockets of irrational exuberance it is becoming a regular feature. Cellular Goods (CBX), a cannabis company of sorts, took advantage of market froth and saw such extreme demand for its IPO that almost everyone was scaled back 97.5 percent – receiving a tiny amount of their allocation.

I sold the stock I received in the pre-market before the opening bell for a near 300 percent profit. The stock listed at 5p, yet by the time many trading platforms had the stock the price was over 27p - and people were still happy to pay it! In trading, the valuation of the company doesn’t matter (which is just as well as the stock at 27p looked richer than a triple-chocolate gateaux), but you do have to consider who is on the other side of the trade.

At any flotation, you have people who stag it into any early rise for a quick profit – as I did. You also have the early shareholders – those who have been in the business for a long period and now have a chance to crystallise some profit.

But to stimulate demand and assure everyone that these early shareholders won’t just unload into liquidity you will often see on an IPO document that these shareholders are ‘locked-in’. What the sellers of the IPO would like you to think this means is that early shareholders won’t be selling, so you can buy the IPO without any worries.

But what this really means is that a “lock-in” is merely a gentleman’s agreement whereby the initial shareholders say that they are not going to sell. The question is: do you believe them? A lock-in is not a legally binding agreement. In fact, there have been several cases where directors have been locked in yet they still sold stock. Nothing happened. They can do it.

Next time you read an IPO prospectus, look at the prices that the seed money is invested at, and ask yourself what would you do if you were in their position. If they are selling down a chunk of their stock in the IPO then it’s possible there will be less dumping – but if the price spikes and I was a seed holder that hadn’t sold any stock? I know what I would do.

Make no mistake, this market is turning into a bubble. But unlike other investment-focused columnists in this magazine, I say get involved. The mania phase is where great gains can be made (and lost of course), so long as you go in with your eyes open. There is nothing wrong with the greater fool theory if you’re successful. But, like everything, it must end. It could be tomorrow or it could be next year.

Can M&S Saatchi stage a fightback?

M&C Saatchi (SAA) is an advertising and marketing group. It suffered an accounting scandal in 2019. The price collapsed from over 300p in August 2019 to below 30p in April 2020. Shareholders had ample time to sell their shares here, and the stock was down trending for month after month.

This is a great example of the market being slow to respond to events. If the market was efficient, this process would be a lot faster, yet instead it takes months for the stock to find a bottom. Humans are naturally loss-averse, and instead of realising that an open position showing a loss is actually a loss, we come up with sayings like ‘it isn’t a loss until you sell’. If you open a trade at 100p and it runs up to 190p, you don’t bank any, and then you close the trade at 110p – what is the result? The outcome is that you have banked 10p but given up 80p because of poor trade management. Unrealised equity on your profit and loss is real equity.

Chart 1 shows the stock gapping up when an RNS was announced that Vin Murria and family had taken over 15 million shares – 13.25 percent of the company. A few days earlier we can see a clear volume spike which I was alerted to from my volume filter on SharePad. The chart had been stable for a few weeks and I suspected this was a seller exiting completely from the stock through a placed trade. This would clear up any existing overhang from the seller and potentially see a change of trend.

When the news came out of the new holder the stock rallied 40 percent in two days which was a nice trade.

In hindsight, it appeared that around these levels would prove to be around the bottom for the company’s stock.

The stock was suspended for several months due to a delay in publishing its audited results. I have marked an arrow when the stock came back from suspension on the lower line. I missed a nice trade here not buying as the shares began trading again, as the company was trading profitably and ahead of management’s expectations.

Since then, the stock has been curving upwards confirming the uptrend. Although I have missed an earlier trade, I feel there is potential to get onboard once the stock breaks through 180p. I have marked this with an arrow on the upper line as this was previous resistance in the stock in 2019.

After such a big rise I would like to see the stock take a breather and consolidate. Sideways trading allows existing position holders to realise profits and bring up the average price of the current shareholder register. The fewer shareholders in large profits the better, as they are less likely to unload into liquidity.

M&C Saatchi is worth going on the watchlist, but unless the stock trends sideways for a period I will leave the stock alone. There is always another trade.

 

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