This article appeared in the November 2003 edition of the ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.

Choosing the right floats

Investing in Initial Public Offerings (IPOs) can make or break the performance of an investor's portfolio - with more than 15 new offerings coming to market before the end of February, now is the perfect time to build your understanding of the IPO market.

Fortunately, the latest round of floats appears different from the dot-com boom where companies were listed on little more than an idea. While the quality of new IPOs can differ dramatically, the latest crop of would-be listings are largely tangible businesses or investments.

Floating on the ASX is an important stage in any organisation's evolution, providing a window for investors to inject new capital or allowing the current owners an opportunity to sell.

Over the long term, the success or failure of a float depends on how effectively new capital is used and the value represented by the offer price.

Potential 'stag' profits, where investors see an immediate profit due to under pricing or heavy demand for the stock, can be an attractive incentive to participate, however your decision should be concentrated on fundamentals rather than short-term market sentiment.

Resources, biotechnology and investment companies make up the majority of new listings ? with investment companies fitting into the long-term investment category and biotechnology and resources rounding out the more speculative offerings.

Apart from matching the client's risk with any potential investment, clients should look for floats containing:
  • Quality management with a track record in their field who are likely to remain after the float
  • Attractive pricing at issue price ? paying particular attention to factors such as dividend yield and price to earnings ratios
  • Entry into a business or asset class at an attractive time in it's market cycle, before substantial capital appreciation
  • Historical information about the business, assets, or investment approach the new entity is offering.
  • Evidence of support from credible financial institutions such as a sponsoring stockbroker

While each of these factors is important, quality management is the most critical factor in considering any IPO.

A list of upcoming floats can be found on the links above.

ASX is interested in your thoughts, please email any comments or feedback on this article.