Shares of Medibank Private Ltd (ASX: MPL) have hit the market with a bang, opening up at $2.22 to bag retail investors a tasty 11% paper profit.
In what has been the market's most highly anticipated float since the partial listing of Telstra Corporation Ltd (ASX: TLS), the sale of the health insurer netted the Australian Government just under $5.7 billion, which is roughly $1 billion more than the Government had initially expected. Shares were sold to institutional investors for $2.15 while the price was capped at $2.00 for mum and dad investors.
Given the extent to which the float was oversubscribed, it's reasonable to expect the share price to skyrocket significantly higher today as institutions attempt to stock up. In fact, some even expect the stock to climb as high as $2.50, which would reflect an incredible 25% single-day profit for around 440,000 retail investors.
Will it last?
When you look at other companies floated by the Government in the past, such as Commonwealth Bank of Australia (ASX: CBA) and CSL Limited (ASX: CSL), it's no wonder investors are so keen to get their hands on Medibank shares. Commonwealth Bank and CSL have both delivered incredible profits to investors over the years, and investors will be hoping for a similar story from Medibank.
However, while Medibank is a good business, its valuation seems significantly stretched at any price above $2.00. It seems that any gains above that price will be based more on hype and the fear of missing out rather than on investing fundamentals, which dictate how important price is when buying shares. Even at $2.15 – the price which institutional investors made their initial purchase – the shares are trading on a P/E ratio of roughly 23 times projected earnings, which is a rather lofty valuation for a stock of Medibank's calibre.
As such, I would expect some investors to start locking in their profits if the price begins edging higher today or in the days to come. It also seems reasonable to assume that the price could retreat over the coming months until there are signs to show that the company's strategy to reduce costs and improve margins is working.
Did you miss out on Medibank? Don't miss this incredible opportunity too!
Until Medibank's shares are trading at a more attractive price, I'll add the stock to my watchlist and continue to explore a number of other opportunities that I believe are presenting as far greater long-term value right now.
