The launch of Virgin Galactic on the New York stock exchange on Monday hasn’t exactly got off to a flying start, as those who stump up cash at IPOs hope. In the first few days the price has already fallen by 14.4%.
It’s still early days, but I’m not surprised, as long-term investors are rarely as interested in the latest blue-sky (in this case literally) stock coming to market as the first-mover enthusiasts. As Warren Buffett pointed out, the early aviation pioneers were not the ones who made all the money, and I’m not going to assume the early space pioneers will be any different.
But what does this say about flotations here in the UK and the wisdom of investing in them? I’m going to take a look at two very different ones.
When Aston Martin (LSE: AML) floated, I wondered who in their right mind would buy shares in a company that had already gone bust seven times in its history. My reservations were not only founded, they were greatly underestimated, and the share price has collapsed 75% since flotation – if ever I’d like to have been wrong about a stock, this was it.
The reason is that the company’s sales just haven’t come up to scratch, but it was always going to be a risky business to invest in at the best of times. Not only is Aston Martin a luxury goods brand, it’s a very exclusive luxury goods brand in a competitive business, and the prestige car market is a very difficult one to succeed in.
And these are not the best of times anyway, with the UK’s predicted post-Brexit recession only one example of the economic malaise gripping the globe.
I’m not even going to bother looking at Aston Martin’s fundamental ratios or forecasts, as it’s just a permanent bargepole stock for me – an example of the kind of stock I would never touch.
The launch of AJ Bell (LSE: AJB) couldn’t have gone more differently, with its price having soared by 70% since flotation. In fact, by May this year, the price had more than doubled before falling back from what was looking distinctly overheated.
The big difference is that the investing platform provider is in a very profitable business and already had a strong track record. No, there were no blue-sky hopes here.
The firm’s year-end trading update on 24 October will have made pleasing reading to those who bought the shares. Total customer numbers increased by 17% over the year, reaching 232,066, and assets under administration climbed 13% to £52.3bn.
Chief executive Andy Bell said: “Our first full year trading update since the IPO demonstrates the resilience of our business model.” He’s right, and the beauty is that nobody should have needed to be told as we can see just how well a very similar approach has worked at bigger FTSE 100 sibling Hargreaves Lansdown.
When thinking about buying at IPO, we always need to remember that the private owners of a company choose their launch price and timing to best benefit themselves and to raise as much cash as they can – not to provide us with a bargain buying opportunity.
So how do I decide which IPOs to go for? Simple, I avoid them all.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019