When the private firm 1st sells its shares to a general public on the stock market, it is known as an IPO means initial public offering. For any business, this is an exciting time, but it’s also the hazardous time to invest. It might be difficult to check the ideal IPO allotment status to invest in. Here are 6 hacks to help you pick the best IPO for your investment portfolio:
Understand the company and its financials
One of the most important things is to thoroughly research the company going for an IPO. Go through their prospectus and financial reports to understand their business model, financial health, growth projections, risks, and competition. Look at key metrics like revenue growth, profitability, debt levels, and cash burn rate. A strong financial position and healthy growth suggest the IPO may perform well.
Evaluate the company’s industry and market conditions
Take a look at the company’s industry and markets. Is the industry growing or mature? What is the size of the addressable market? Is the industry competitive or dominated by a few players? Are there any disruptive trends or technologies impacting the markets? Understanding the industry landscape is key to determining the company’s growth potential and valuation. Favourable conditions increase the chances of a successful IPO.
Consider the valuation and initial pricing
The company’s pre-IPO valuation and initial price band provide clues on whether the IPO is over or undervalued. Compare the valuation with industry peers and historic ratios like P/E, P/S, and P/B ratios. An overvalued IPO with a sky-high valuation and ratios suggests caution. Look for reasonably valued IPOs priced attractively as compared to the company’s earnings, growth, and peers.
Gauge the hype and investor demand
As the IPO date nears, gauge the market hype and investor demand for the offering. Strong enthusiasm and oversubscription of the IPO by institutional and retail investors indicate high demand. This suggests a higher likelihood of the stock price popping on the listing. However, extremely high hype and overvaluation could also signal risks of a post-listing plunge. Manage your expectations and allocations carefully for oversubscribed IPOs.
Choose an IPO with strong backing
Look for IPOs with strong backing from marquee institutional investors like Fidelity, T Rowe Price, or Softbank. Their extensive research and due diligence validate the company’s prospects and valuation. Prominent venture capital and private equity firms with a track record of steering companies through successful public listings are also a good sign.
Allocate wisely and diversify across IPOs
While an IPO may look attractive, remember not to allocate a large portion of your portfolio to it. IPOs are inherently risky as the companies often lack a long-term stock market track record. Spread out your investment across a basket of 4-5 IPOs from different sectors as a diversified strategy. Allocate only a small portion, around 2-5%, of your total portfolio value to each IPO.
Evaluating the company’s financials, industry dynamics, valuation, investor demand, and backers provides a rigorous framework to pick promising latest IPO. Applying these hacks can help you invest wisely for a high probability of solid IPO returns. However, focus on portfolio diversification and managing risks, as short-term price volatility is common with new public listings. Do your homework and let the company establish a public track record before making large allocations.