Due to this January phenomenon, we should take a look at the performance of November and December IPOs beginning in February of the following year. As I have noted in my reports in recent months, offering price valuations have been at a historically low level since the fall of 2007. Usually, securities companies determine an offering price based on the stock prices of peer companies and then apply a so-called IPO discount. In a bear market, this discount becomes very large. Because of this, we are now seeing offering prices discounted to more than 30% below the fair value.
But the January prices of November and December IPOs are more than 37% higher than the offering prices. Is this an anomaly? Or does this show that investors are simply bidding up prices to the fair value? We will have to wait to see where stock prices go in February to learn the answer.
Quarterly earnings announcements in early February will probably determine if the November and December IPO stocks can stay above their offering prices. Companies planning an IPO always announce current fiscal year forecast when an exchange listing is approved. For a company with a March fiscal year end, the third quarter earnings release is generally a good indicator of whether or not the company will achieve the forecast. If investors decide that the forecast will be met, the company’s price will go above the offering price. Concerns about a probable shortfall will of course cause the stock price to fall.
The first IPO of 2008 was Digital Hearts (TSE Mothers 3620). When trading began on February 1, no shares were traded as a flood of buy orders pushed up the indicated price to \375,000, far above the offering price of \185,000. The next day, the first shares were finally traded at \430,000. This follows the pattern of past years in which the first IPO of each year usually generates so much investor interest that no trades occur on the first day. Digital Hearts’ high opening price demonstrates that individual investors are still very enthusiastic about IPOs.
On the other hand, investor interest so strong that a newly listed stock fails to trade the first day is often a sign of trouble later on. As I just noted, the first IPO of each year typically has a high opening price. But most of these stocks end the year with a poor performance. This reminds me of the saying “the last drop makes the cup run over.” What this means is that investors should never be tempted by an IPO stock that has opened at a high price.
The February IPO of MID Urban Development (formerly Matsushita Investment & Development) attracted a lot of attention. Unfortunately, the offering has been postponed because of the recent drop in stock prices. But there is another noteworthy February IPO scheduled: Seven Bank, which is affiliated with Seven-Eleven Japan. This bank has absolutely no exposure to credit risk. In fact, the company should be valued more as an ATM systems company than a bank. A positive free cash flow and an absence of plans for additional equity-related financing activity make Seven Bank attractive. Therefore, the offering price PER of 13 based on the current fiscal year forecast appears to be way too low for this company in relation to its strengths. For IPOs, the basic strategy is normally to buy at the offering price and sell at the opening price. But if Seven Bank opens at a relatively low price, investors should consider buying this stock at the opening price and making it a long-term holding.
