Interactive Investor

Five-point checklist for picking a winning IPO 

19th May 2021 15:21

Graeme Evans from interactive investor

Deciding if a new stock will succeed is not easy, but these handy tips should help. 

The debuts of Deliveroo (LSE:ROO) and Alphawave IP (LSE:AWE) haven't gone to plan so far, but a look at new stock market listings going back three decades shows the UK is fertile ground for attractive IPOs.

The analysis by broker Liberum reveals that the share prices of UK IPOs perform much better on average than European or US counterparts, with greater earnings per share growth and relative share price performance over the long term.

Liberum's research will help to debunk some of the IPO envy UK-focused investors may have felt after last year's spurt of high-growth Wall Street tech listings, including Airbnb (NASDAQ:ABNB) and data warehouse company Snowflake (NYSE:SNOW).

The UK has played catch up in 2021 and with a couple of exceptions — Deliveroo being the most significant — the newcomers are performing well so far. 

Out of 29 IPOs with a market capitalisation of more than £100 million in the year up to the arrival of Darktrace (LSE:DARK) in mid-April, Liberum said the average share price appreciation across the group since their offer date is 45.6%.

Top performers have included Bytes Technology (LSE:BYIT), Kooth (LSE:KOO), Helium One Global (LSE:HE1) and Auction Technology Group (LSE:ATG). Among the highest profile IPOs, Trustpilot Group (LSE:TRST) is 19% higher over the coverage period, Moonpig (LSE:MOON) up 21.7% and Dr Martens (LSE:DOCS) 29.8% stronger.

It's worth remembering that retail investors haven't secured all these gains as they are usually excluded from buying into flotations at the issue price before the stock hits the market.

Liberum's four picks on the list of 29 IPOs are In The Style Group (LSE:ITS), Virgin Wines UK (LSE:VINO), SourceBio International (LSE:SBI) and Hut Group owner THG (LSE:THG), which has risen 19.2% since its August debut.

Five things for IPO investors to remember 

The broker notes that current conditions are favourable for new stocks, citing five recommendations for providing attractive and sustained outperformance from IPO investments. 

1. First, its analysis of IPOs between 1991 and 2011 shows that those starting out in the two years after a period of market turmoil will perform better than those that list before or during a bear market.

2. Liberum adds that the first three to five years after the IPO tend to show the strongest growth: “After this point, growth moderates slightly, yet young companies still outgrow their respective markets by some distance over the long-term.

“The faster the growth out of the gates, the greater the potential for a more meaningful moderation beyond a medium-term holding period.”

3. The report, which covers the periods of the dotcom crash and the financial crisis, also recommends that investors focus on net margins, given the tendency for these to decline after three to five years.

4. It concludes: “IPO investors would do best to ride the growth phase and avoid any reinvestment phase. A UK investment, during a period of recovery and where corporate governance is sound, completes the winning combination.”

5. And an earlier point worth repeating is that the average performance of UK IPOs is a lot better than European or US counterparts.

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