Low-Priced Fresh-Issue IPOs Deliver Stronger Gains for Long-Term Investors

Fresh-Issue IPOs: A Pathway to Stronger Long-Term Gains for Investors

Investors are finding that cheaper, fresh-issue IPOs are yielding more substantial returns when held over the long term.

Performance of Low-Priced IPOs

According to data from Capitaline and Prime Database, of the 38 mainboard IPOs listed between January and August that reported earnings, those priced below 20 times earnings returned a median of 45.4% by September 29. This is notably higher than the overall median return of 33% for all such issues. Most of these gains were realized post-listing, with shares opening at a median premium of just 5.3% but rising a median of 35.2% from their listing-day close.

Among these, nine of the twelve IPOs primarily raised fresh capital, yielding a median return of 51.3%. In contrast, pricier IPOs, valued at 30-50 times earnings, delivered a higher median return of 58.8%, but their gains were primarily front-loaded, with a median listing-day premium of 23.2% and only a subsequent increase of 10.5%.

The Impact of Fresh Capital

Abhay Agarwal, founder and fund manager at Piper Serica, emphasizes that IPOs with no valuation multiples tend to leave more room for investor gains. In contrast, pure Offer for Sale (OFS) listings often feature existing shareholders looking to exit, which can limit the potential upside for new investors. For instance, the three OFS listings in the 30-50 times earnings band returned a median of just 24.1%.

Notably, companies like Indo-MIM and Shadowfax Technologies, which had high P/E multiples, still attracted investor interest due to their robust growth prospects. Agarwal notes that while higher multiples can indicate faster growth, they must be evaluated in the context of the price-to-earnings growth ratio to determine their attractiveness.

Caution Against Accounting Manipulations

Analysts caution investors to be wary of companies that show sudden spikes in profitability, as these may be the result of accounting manipulations designed to make IPOs appear more attractive. A consistent earnings trajectory over three years is a more reliable indicator of a company’s health than a one-time profit surge.

Kranthi Bathini, equity strategist at WealthMills Securities, reinforces this perspective, stating that stock prices ultimately reflect earnings. While there may be short-term discrepancies in valuations, the market tends to adjust over time, aligning prices with underlying earnings performance.

Key Highlights

• IPOs priced below 20 times earnings returned a median of 45.4% by September 29.
• Fresh capital-raising IPOs outperformed pricier counterparts, yielding a median return of 51.3%.
• High P/E multiple IPOs showed strong initial returns but limited subsequent gains.
• Investors are advised to scrutinize earnings trajectories to avoid potential accounting manipulations.
• Market adjustments often align stock prices with actual earnings over time.

Investor Note: The current trend indicates that investors may benefit from focusing on cheaper, fresh-issue IPOs that prioritize capital growth. However, due diligence remains essential to avoid pitfalls associated with inflated valuations and accounting discrepancies.