The IPO market is a strange place with its own jargon. Words have their own meaning, and hyperbolic understatements or overstatements seem to flourish.
When LoanCore Realty Trust, a real estate finance company, pulled out of its IPO on June 30th, “market conditions” was cited as the main reason. The reality is nobody wanted to buy this stock at the price offered even with a big discount. Interestingly, this “market volatility” did not prevent Glaukos (GKS), a medical technology company, from opening with a pop of +61.72% that same week…
The “price sensitivity” (which can be quite prevalent) needs to be interpreted as the offered price being simply too high, and that the solicited investors are sending the bankers back to their desk to sharpen their pencils. On July 17th, after its roadshow, the communication provider Ooma Inc. decided to price its stock at $13, way below the initial range of $16-$18. But even that was not enough: it opened at $12.10 (-6.92%).
When we hear during the channel checks that the book is “solid”, or that a certain stock experiences a good “one-on-one conversion”, what is most likely happening is that bookrunners are struggling to convince investors the deal is worth their money.
Cautiousness is also required when the deal is categorized as oversubscribed, or even very well oversubscribed. Most investors are asking for more allocation than they desire because they want to increase their chances of getting a decent amount of stocks. If you combine this with the smooth talking talents of IPO desk traders, you end up with situations similar to 8point3 Energy Partners (CAFD): “a very well oversubscribed and in excellent shape” deal priced at the top range of $21, but opening at $20.75 (-1.19%) on June 29th.
What about multiple oversubscribed deals? Here again you could find a “dog” instead of the hot IPO you expected. For example, the medical device company EndoChoice Holding (GI) opened with a loss of -3.33% on June 5th despite having been credited as having blockbuster potential.
The street buzz is nevertheless a key source of critical information, but must be crossed checked with objective facts. There are many subtle signs of an upcoming hot IPO, such as a road show promptly following the filing (usually within 6-8 weeks), an order book closing earlier than planned, and/or a final pricing set at least a day before the trading day. But nothing is more revealing than the pricing itself and the final size of the IPO.
When the stocks are priced above the prevailing range, the chances are very high that you’ll see a nice pop at opening. In July, we participated in Ollie’s Bargain Outlet Holdings’ IPO (OLLI) priced at $16 after an initial price range of $13-$15. We sold the shares at $21.15 (+32.19%).
The old Wall Street adage “You increased the deal? Double my order!” is still relevant today. When the underwriters increase the number of shares offered during the IPO process, a nice profit on the first day is usually in sight. In July, Blue Buffalo Pet Products (BUFF) offered 15% more shares than initially planned in its prospectus, and we made a whopping +32% gain.
We also participated in the MCBC Holding (MCFT) offering in July, which netted us a decent 4.17% return. Our Year-to-Date Return on Investment is now 29.87%.
There is no sign of a summer break, especially in the US, where several health-conscious IPOs are in the pipe.