On the secondary market, two of the April IPOs had an opening price below the offering price, seven had an opening price that was about the same, and six had an opening price that was more than 50% higher. There were two distinct patterns for subsequent market prices. The two companies priced below the offering price were still at that level at the end of April, showing no signs of moving upward. But stock prices remained strong at the six companies with an opening price premium of at least 50%. All six companies belong to the IT sector. Obviously, individual investors are still attracted by the growth potential of IT companies even amid today's poor market conditions.
One highlight was the April 26 IPO by Asia Media, which was the first IPO in Japan by a Chinese company. This company operates a TV listing channel and a TV advertising agency in China. The stock price has been climbing steadily even though the opening price was only 5% above the offering price. In the past, the performance of foreign company stocks has been held back by the inability of individual investors to buy and sell these stocks using Internet securities company accounts. As a result, prices of foreign company IPOs have frequently plummeted on the listing date due to massive sell orders from individuals who bought stock through the public offering. But this did not happen with Asia Media. One reason is measures by Internet securities companies to improve access to foreign stocks. Another is the general interest among individual investors in Chinese companies.
There are only three IPOs scheduled for May 2007, the same as in May 2006 and 2005. Opening prices are often much higher than offering prices in May because of the small number of issues. In fact, we have seen the highest opening price premiums at this time of the year in each of the past several years. That means investors fortunate enough to buy stocks at the offering price should consider selling at the opening price. Furthermore, investors should not buy IPO stocks when the opening price is more than twice the offering price.
I would like to end my commentary with an observation about small company stock markets. After the Golden Week holiday, we will see a large number of earnings announcements by companies with a March fiscal year. Of the 188 IPOs in 2006, 30% of the companies with shares traded on small company markets lowered their earnings forecasts. The resulting loss in confidence in the forecasts of these companies caused their stocks to fall considerably.
Companies will provide forecasts for the year ending in March 2008 when they announce their performance in the past fiscal year. Since so many companies cut their forecasts last year, we will probably see extremely conservative sales and earnings targets for the current fiscal year. That means we are not likely to see many small companies make the same mistake this year. This process should provide clear signs of which stocks will attract more money and which stocks will be sold off. Currently, valuations on small stock markets are generally the same for strong and weak companies alike. But investors may soon become more selective, pushing up valuations of strong companies while allowing the weaker stocks to fall even more.
