| IPO Market Summary |
Analysis and Comments There were eight IPOs in July, far below the 26 IPOs in June. By market, there were three Osaka Hercules IPOs, two TSE Mothers IPOs, and one each on the OSE second section, Sapporo Stock Exchange and TSE second section. There was not a single IPO on JASDAQ, which specializes in small companies. The average opening price of the eight July IPOs was 63% above the average offering price, much less than the average of 100.67% for all 101 IPOs thus far in 2006. Looking at individual issues, the opening price of CyberStep (TSE Mothers), which was listed on July 5, was up 216%. But the opening prices of Tokyo Tatemono Real Estate Sales (TSE 2nd), listed July 13, and Kawasaki (OSE 2nd), listed July 27, were both below the offering prices. So the level of the opening price varied dramatically from one issue to another. Following the listing dates, only Tokyo Tatemono Real Estate Sales, which began trading below its offering price, has kept its stock price above the opening price. All seven other July IPOs have fallen below their offering prices. CyberStep, which had the highest opening/offering price multiple, has plummeted to half its opening price. Most 2006 IPOs have followed this pattern of prices declines after the first trade. Of the 101 IPOs thus far in 2006, only 11 are still trading above their opening prices. For almost 90% of these issues, the stock price peaked at about the opening price. Furthermore, based on July 31 closing prices, 49 of the 101 IPOs were trading above their offering prices and 52 of these issues were below their offering prices. Taking a closer look at companies trading below their offering prices reveals that every IPO from the February 17 Applied IPO through the March 19 KS Frozen Foods IPO, a total of 18 IPOs, is now below its offering price. These are all IPOs that took place more than one month after the “Livedoor shock,” just as Japan’s small-company securities markets were recovering somewhat. At that time, opening prices were generally weak. Around the end of 2005, the mood was generally optimistic in Japan’s small-company stock markets. Therefore, it is possible that offering prices were set somewhat high. In April, IPO opening prices began to climb, but most companies saw their stock prices lose momentum soon afterward. One cause is the large number of companies traded on small-company stock markets that lowered earnings forecasts or revised their earnings releases when announcing results for the March 2006 fiscal year. Investors quickly lost faith in the earnings forecasts of these companies. Small-company stock markets dropped as a result. The TSE Mothers and Osaka Hercules indexes have fallen by more than 50% in 2006. This has probably had a substantial impact on IPOs. After witnessing this drop, many individual investors have probably sworn off putting their money in small-company stock markets. But today’s market weakness should instead be viewed as an excellent buying opportunity. Why? The answer lies in the mechanism for setting offering prices for IPOs. In general, these prices are set by securities companies based on comparisons with peer companies. A reasonable stock price is calculated in accordance with valuations of publicly owned companies of about the same size with similar business activities. An IPO discount is then included to obtain the offering price. For companies to be listed on a small-company market, peer-company comparisons can be made only with other companies already listed on these markets. Under current market conditions, peer company PERs are fairly low. Moreover, the IPO discount is increasing due to the large number of recent instances where stock prices fell below the offering price soon after the IPO. (For more information, read my book “The No. 1 Information Site The Tokyo IPO Editor Tells All! How To Really Make Money on IPOs.”) To reiterate, small-stock markets are now generally undervalued. In addition, prices of many recent IPOs are currently less than their offering prices, which were set at a level below even their peer companies. The conclusion is obvious: Current prices of recent IPOs are unusually low. Here is my checklist for selecting issues to buy. We are clearly seeing a rare opportunity for individuals who are interested in making investments rather than merely trading stocks.
Please select suitable stocks based on your own research.
Nishibori Takashi |