The difference an industry can make

Published at Oct 1, 2017, in Features

Early IPO performance influenced by sector, industry, sentiment

With most established listed companies, there is something of a consensus on value. This is because the company has traded publicly, and much of their recent commercial history is public information as well. Their revenues and profits may also be quite mature and easy to predict, and the value of future cash flows is therefore easier to determine.

With new listings on the ASX, there is less of a consensus on the relative value of a firm. As such, once the firm starts trading, we can see large movements either way as traders and investors reach an early equilibrium price.

However, these initial moves are not necessarily a reflection of the future cash flow prospects of the business. Rather, they reflect the immediate sentiment and the industry in which they operate.

In fact, the industry and sector of a new ASX listed issue appears to be one of the deciding factors in the early performance of the share price. The more ‘in vogue’ the sector, the better the performance.

IPOs by sector

In the first half of 2017, the medicinal cannabis sector was perhaps the most fashionable sector, with four of the top ten performing IPOs of 1H2017 having links to the sector; perhaps indicating the positive sentiment and bullish view on the sector from investors.

The weakest performing sectors for 2017 IPOs included the telecommunications and real estate sectors, which is perhaps also indicative of the sentiment investors have for these sectors.

Of course, historical data in terms of earnings performance and/or share trading patterns should not be used as the basis for an investment as they may or may not be replicated.

There is an admittedly small sample size for IPOs in these sectors this year, but those that have listed have perhaps been influenced by the recent weakness of Telstra (our largest listed telecom), and the growing belief that our property market may be peaking.

It’s about the long term

These is a quote from a very famous historic investor: “In the short run, the market is a voting machine, but in the long run it is a weighing machine.” So while popular firms and sectors may do incredibly well in early trade, this isn’t necessarily a reflection of the long term prospects and valuation of the business.

Indeed, the longer term performance of any business is less down to the near-term sentiment and popularity of the business, and more down to their ability to generate revenues, manage costs, and deliver profits.

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