Primary Market Offers: Goldmine or Hole in the Pocket?

You will find many investors who have bought shares only through primary offers. They either don’t know about or understand the secondary market or simply haven’t cultivated any interest in it. For such investors, public offers, including IPOs, are the market. Well, until recently, buying into such offers was a relatively dependable process. Not any more, many would agree.

If you saw some of the recent public offers as an opportunity to position strongly in certain stocks, you might have suffered a rude shock, like many did. You most likely got a scanty allotment out of your application. Your money was inevitably tied down for months and got returned, at the end, with a paltry interest payment. If you went for a huge bank loan to corner a large chunk of the shares, your problem got more compounded. In some cases, investors have picked losses in interest cost that ran into hundreds of thousands of Naira.

One outcome of the oversubscription and partial allotment experience is that many have begun to detest primary offers. Certainly, if they end up inflicting financial misfortune, there would be no justification for them. But before you take that position, let’s examine some of the recent offers to see how the stocks have fared upon listing. That possibly helps you do a deeper assessment of the market potentials of such offers, even in the short-term.

Here’s an analysis, complied 26/4/08, showing some recent offers and their market performance upon listing. Note that the general decline in prices has affected most of them. That’s why you have a column showing “post offer high” to see how far they got before bowing to market pressure.

Some of the deductions that can be include:

• Most of the stocks received very positive market response on listing or lifting of suspension. Even after significant decline in the face of the bearish market, most have still maintained a decent margin of appreciation over their offer price. International Breweries, Thomas Wyatt, Costain and Japaul stand out in that regard. Judged against the post offer peak prices, the gains become even more substantial. International Breweries, for instance, had risen 1611% before dropping.
• While each offer needs to be judged on its merit before subscription, the pattern of post-offer market performance does present an important opportunity for profit, judging by the post-offer trend of these stocks.
• Certificates may not be readily available to many investors in the initial period of release after the offer. Consequently, those who are able to track and receive theirs quickly are better placed to crystallize their gains, should they desire to do so. In effect, rather than wait endlessly for your certificate to be delivered to you, some tracking effort may mean a boost to your capacity to earn from an issue, in the short term. The e-Certificate will change all that, but even then, understanding the price patterns and acting appropriately may still make a lot of difference in what investors finally take home.
• The oversubscription pattern is largely widespread. Apparently, more investors are chasing after the offers, or put differently, more money is chasing after them. That means oversubscription can’t be readily wished away at this point. To that extent, very heavy subscriptions may stand little chance of substantial allotment.

All said, primary offers have shown a pattern of strong post-offer price performance. It may therefore not be totally helpful to shun them. That doesn't say that every offer will turn out a good investment. But there is an opportunity there not to wave aside. What will work is to re-strategise in the light of the known demand pattern and ask for what stands a fair chance, rather than tie huge sums down. When an offer looks good to you, it probably looks that way to many others. Sinking a lot of money into it, in the present circumstance, has a price which you must consider. On way out is to also invest for your dependants. To optimize on your earnings, the post-offer price trend needs to be watched too. Most will tire out after a sustained upward drive and can seriously tumble. Knowing how to exit at a fair price level will boost your earnings. This will be easier for you if you set your target exit price even well ahead or adopt a trailing stop strategy to avoid losing a significant portion of gains you make.

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