If you were lucky enough to get shares in PhytoTech Medical Ltd (ASX: PYL) at its Initial Public Offering (IPO), tripling your investment is exactly what you've done.
Congratulations.
Unfortunately I think the share price is on a one way ticket downhill, so I would suggest selling out with your profits before you miss your opportunity.
A similar situation occurred in 2013 when Freelancer Ltd (ASX: FLN) made its debut on the ASX.
After launching at a price of 50 cents – which was incidentally 463 times its 2013 earnings – shares soared to $1.80 on the first day and have been sinking ever since.
Freelancer now trades at $0.61 cents over twelve months later. The price spike is believed to be due to a combination of factors, 1) a 'hot' new tech stock, in this case an online outsourcing marketplace, combined with 2) the fact that a majority of the company's shares were held by institutions, forcing individual investors who missed the IPO to pay increasingly greater sums in competition for a small number of shares being traded.
This is exactly the same situation that PhytoTech Medical shareholders are in.
A 'hot' stock (Australia's first medicinal marijuana company) is driving strong demand, which combined with a very small amount of publicly traded shares (only around 250 individual investors were allotted shares as part of the IPO) – has sent share prices soaring.
If that doesn't convince you, maybe the staggering risks associated with PhytoTech can convince you to sell out while you're ahead.
In addition to the risks listed in that article, I also believe there is a very high chance that PhytoTech will be raising capital fairly shortly.
While $5 million in cash is a comfortable buffer at present, drug trials are expensive and time consuming, and growing medical grade drugs requires a lot more than just a patch of dirt and a shovel.
PhytoTech may be headed back to investors at some point, either institutional or retail, cap in hand, most likely accepting loans in return for issues of a very high number of shares.
Those investors certainly aren't going to be accepting shares at their face value of $0.60 cents, and will likely require a hefty discount before parting with their hard earned cash.
If none of these other factors do it, a discounted capital raising is sure to bring share prices back to earth with a thump.
So take your winnings out of PhytoTech, and consider investing them in a stock that stands on its own feet financially, has low downside risks, and enjoys substantial competitive advantages that put it head and shoulders above its peers.
