It's not far-fetched to describe the current initial public offering (IPO) market as 'frenzied' with a flood of vendors looking to capitalise on a window of opportunity which sees investor demand for new issues running at levels not seen in years.
After a brief stutter that saw the IPO of transport firm McAleese (ASX: MCS) delayed, the specialised transport and logistics provider began trading on the ASX last Thursday. Having offered its shares for sale at $1.47, the stock finished the first day of trading at $1.57. After reaching a high of $1.63 on Friday, the shares are currently selling at $1.55. The pricing of the McAlesse float looked appealing with a forecast dividend yield of 5% and a price-to-earnings ratio at 9.5. These reasonable metrics have no doubt helped provide support to the stock price post listing.
In contrast, online employment site owner Freelancer (ASX: FLN), which had an IPO price of 50 cents, soared on its opening day (November 15) to a high of $2.60, leaving many investors sorely disappointed that they had missed out on an allocation. However after the initial excitement, the shares have lost ground. Today (December 3) they have fallen over 13% to be trading hands at $1.05 per share.
It certainly hasn't been all smooth sailing in the IPO department. Despite Freelancer's volatile share price, the stock is still up over 100% on its offer price. Meanwhile mining services and logistics business BIS Industries has shelved its IPO plans having struggled to gain traction with ongoing investor concern regarding the resource industry.
Foolish takeaway
It's a busy time for IPOs with Dick Smith, Veda Group and Nine Entertainment all coming up. While the potential for an initial profit – often referred to as a 'stag profit' — is appealing, in the long run the returns an investor receives will generally mimic the performance of the underlying business, assuming a fair price was paid initially.
The flood of IPOs is bound to excite investors however a focus on value and the underlying business potential is paramount and ultimately what determines long-term returns.
