IPOs are overpriced

No wonder Warren Buffett has recommended investors stay away

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published December 13, 2013 9:41 am AEDT

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

Really?

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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