- IPOs are back in focus
- Deliveroo the biggest yet
- Potential opportunity at materials technology company listed in December
The market has shifted up another gear in recent weeks. IPOs are flooding back, with many a company lined up to offer its wares on the stock exchange. Appetite for placings is through the roof, with fuel-cell technology developer Ceres Power (CWR) offering £180m in a share placing and seeing it oversubscribed by nearly 10 times that amount. This is a mix of both institutional and retail money.
It is now a year since the first lockdown began and that period marked the bottom of the coronavirus collapse. In those 12 months, we have seen a fabulous recovery in equity markets. Anyone who started buying shares in late March 2020 has taken part in the best 12 months in the stock market of all time. No other period has ever seen such stupendous gain. Those who were around for the dotcom boom may make some comparison, but this time the gains have come across many sectors. This means that lots of people have made money and risk appetite increases in search of more and bigger gains.
The IPO of Deliveroo is – at the time of writing – billed to be between £7.6bn and £8.8bn. There is a retail offering but with a market cap so large where is the upside? Warren Buffett has an excellent quote on IPOs: “An IPO is like a negotiated transaction – the seller chooses when to come public – and it's unlikely to be a time that's favourable to you.” In this market there is money to be made stagging IPOs – but with such a high market cap there may not be anything left for me. Personally, I’d much rather be a Deliveroo customer than a shareholder.
Heiq (HEIQ) is a recent listing through a reverse takeover that came to the market in early December last year. Its first week of trading was uneventful. Then, the stock broke out and doubled within a few weeks.
The company is a materials technology company which innovates with textiles. This functionality includes antimicrobial properties, water repellence, the prevention or odours and air purification. It sounds exciting, which could be a reason for the rapid rise in the share price. Technology companies often attract plenty of interest and it is often private investors that move share prices in SETSqx traded stocks.
In Chart 1 we can see the rise in the share price in the first few weeks of December. The stock pulled back and saw the dip get bought and the price move north again. This is a bullish sign. Stocks should be like tennis balls – when they drop they should bounce. The opposite of a tennis ball is an egg. When eggs drop, they go splat. Eggs are to be avoided.
However, on 26 January the stock announced a trading update. I’ve marked on the chart the price action and the surge in volume on this day. At first glance, it appeared that the update was good. Yet the market perceived this differently with the stock closing at the day’s low nearly 20 percent off the open price, before gapping down the next session and falling further.
The stock sold off on this trading update even though revenue exceeded market expectations and operating profit was anticipated to be in line with market expectations even after record investment by the company. One potential reason for this is that there were no numbers in the trading update. Another could be that the stock was looking for a reason to selloff after such a rapid rise. It could’ve also been that shareholders were expecting more.
Both traders and investors tend to move in herds. This is why people will buy stocks when they are already 200 percent up on the day and why people will panic sell when everyone else around them is doing the same. The truth is that everybody wants to be a contrarian, but nobody wants to be different. I prefer going with the herd but only at opportune moments when it is advantageous for me to do so.
Looking across to Chart 2, I’ve outlined the recent range of resistance. Heiq is still trading off the highs, and I would like to see a gentle trend upwards towards the resistance and a burst through on heavier-than-average volume.
The problem with the stock breaking out after a sharp rally is that traders will be eager to bank quick profits into resistance. Rather, I want traders getting onboard into the breakout rather than selling at the resistance. By looking at the chart, you can gauge the momentum and sentiment. At the current price of 202.5p the stock would need to rally nearly 20 per cent before it was at the breakout price. Chasing prices can sometimes be great in momentum plays but be wary of the stock reversing quickly. I have found that if I miss my entry then instead of chasing I load half a position with a very tight stop – this means that if the stock does reverse I am out for minimal damage. But if it does continue I am onboard with the trend. Ideally, we want to be in at the start of the move and the optimal point.
With regards to Heiq, if it breaks 240p by continuing to trend upwards slowly then I am interested. But just remember: not all breakouts are created equal. We should not treat them as such.
