IPOs are overpriced

Fund managers have come out and are now saying that some of the recent IPOs were overpriced.


Their peers who actually invested in some of those ‘overpriced’ IPOs would have like to know that earlier, with several stocks already trading below their issue price. In the past 12 months, the ASX has seen a record $10 billion worth of IPOs come to market, including Nine Entertainment (ASX: NEC), Dick Smith Holdings (ASX: DSH), credit rating company Veda (ASX: VED) and transport group McAleese (MCS).

Nine Entertainment is trading around 9% below its listing price of $2.05, which itself was at the bottom of the range of $2.05 to $2.35 that was pitched to investors. According to media reports, Nine said the float could have been done at $2.10, but the company wanted demand to exceed supply to support the stock after listing. Guess that worked, not. The issue for Nine is that concerns remain over the viability of free-to-air broadcasters as advertising moves onto the internet.

McAleese was offered to investors at $1.47, and is currently trading around $1.45, so it’s fairly close, but again, the company was almost forced to pull its float after one of its fuel tankers was involved in a fatal crash in Sydney, and 89 of its tankers were subsequently grounded. Last year McAleese was touted as a potential $1 billion company, but the company raised just $166 million in the IPO, giving it a market cap of around $420 million.

Consumer electronics retailer Dick Smith was touted as a serious rival to JB Hi-Fi (ASX: JBH) and Harvey Norman (ASX: HVN), with the company turning around its performance in just twelve months, after being sold off by Woolworths to private equity. Offered to the market at $2.20 per share, Dick Smith is now trading at $2.18, and it wouldn’t surprise me to see it fall further.

Foolish takeaway

Warren Buffett has recommended avoiding IPOs, for the following reason: “It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors).”

Good advice I reckon.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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