IPO info your broker will not tell you

It’s not something that people get from a sneezing commuter, but probably just as virulent, if not more. And if you talk to players in the stock market, they’ll say a lot of equities investors are already capitulating to it.

I’m talking about the bug that’s currently causing an IPO fever among equities investors. This year’s IPO fever seems to be growing more intense as an increasing number of companies turn to the stock market to raise funds and as more investors get bored with low returns of fixed-income instruments. Or in some cases, things like time deposit.

I wrote about this earlier today (read the article here) and was I relieved to find that at the senior management level, the exuberance about IPOs was a bit tempered and more palatable – at least to me.

I like how Jenny F. Ting Jr., senior manager at BPI Asset Management, in fact discouraged flippers – those who buy IPO shares only to unload in a few days so they can ride the initial run-up in prices. Definitely, this is not the kind of advice you will hear from brokers.

“Don’t buy blindly. Get a prospectus and read it. Analyze the company, the industry where it belongs, and compare it with its competitors,” Ting said.

Buy into an IPO not because it’s hot, but because you think the company is a good one and that it’s priced fairly. In fact, that’s a value investor’s reason for buying any stock — IPO or not.

Companies that have announced plans to hold an IPO include Northwind Power Development Co., which operates a wind farm in the northern province of Ilocos Norte; ethanol fuel producer San Carlos Bionenergy Inc., based in Negros Occidental province; PNOC Alternative Fuels Corp., a biofuel unit of state-owned Philippine National Oil Co.; and Enerfuse Holdings Inc., also a biofuel producer, Davao-based oil firm Phoenix Petroleum Philippines Inc., high-rise housing developer Anchor Land Holdings Inc., McDonald’s master franchise holder Golden Arches, Asia Brewery, Cebu Pacific in 2009 and Aboitiz Power Corp., a unit of Aboitiz Equity.

National Reinsurance Corp. of the Philippines, which will hold its market debut tomorrow, has a P3.80 per share initial price offering. PCCI Securities Brokers Corp. president Francisco M. Liboro said National Re would likely hit its ceiling price of P5.70 on Friday. “National Re is a good company to include in one’s portfolio. It’s not exciting, it’s an insurance company, but it has good prospects,” he said at the Good News Kapihan this morning.

Demand for the stock was high enough that there has already been over the counter trading at P5 per share. In OTC trading, the shares trade hands on an honesty-based system where your shares are bought in someone else’s name. Let’s say I’m a broker and I have an allocation of P200,000 but I don’t have money. You can buy those shares but they will be bought in my name. A seasoned investor told me OTC trading is tricky, but it could work if you really trust your broker.

If you bought half a million National Re shares at P3.80, your P1.9 million will grow to P2.85 million in a single trading day. Pretty good, huh. But let’s say 60 percent of those who bought National Re unload the shares tomorrow or Monday, what will happen to the stock price? Flippers can, in fact, cause a perfectly good IPO to turn into a dud.

Some think IPOs are for first-timers. Nothing can be further from the truth. In fact, in most advanced markets, a good broker would most likely think twice about selling to someone they don’t know. Brokers save their IPOs for favored clients. If they start pushing IPOs to anybody they ran across, I would be suspicious. That might mean you are getting stocks the “favored clients” didn’t like.

It would be best to pick a strong broker, establish a working relationship with him, and look for someone who takes the time to understand your risk tolerance. When its time to choose which IPO to invest in, don’t drag your feet in poring over the prospectus. That’s where the information on a company’s financial status is disclosed. Find out where they are going to use the proceeds of the IPO. Investopedia.com says it is a bad sign if a company will use the IPO to pay their loans. If the money is intended for marketing, expanding to other markets, or research and development, that shows a much better prospect for the company.

But don’t put your faith in the prospectus alone. Do your own research. Study the management. Make sure you read the accounting figures well because naturally, there’s risk the company will be too bullish with their forecast. The problem with an IPO is that information on the company is hard to get, compared with companies that are already listed and open to anyone’s scrutiny.

There is money to be made in IPOs, but approach them with a healthy dose of skepticism and a willingness to do the extra work of understanding the company behind them. This IPO fever can end this year or last for many more years until, as Liboro says, the next flop happens.

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