Recently on the blog we looked at the 2016 financial year IPOs that performed well and those that did not. When a new stock does well it is usually very easy to see the reasons why. Among other things, the reasons generally relate to a clear upward trajectory of earnings, a strong balance sheet, and minimal fluff from manegement. However, in amongst the prospectus, selective language, and colourful, upward trending graphs, it can often be more difficult to predict the losers before they happen. Using hindsight though, we can point to certain similarities that could help investors avoid these in the future.
In this article I will comment on four of the worst performers for the year, why they performed poorly, and what we can learn from them.
Temple and Webster
Temple and Webster (ASX: TPW) has been the worst performing stock of the financial year falling a staggering 86% from its IPO price of $1.10 to around $0.15 per share. When you look at the prospectus you might not actually be surprised though, as the company has not turned a profit for the last 3 years and was not forecasting one for 2016 either.
This is one of the first things value investors should look for in an investment: a history of growing profits. Blaming a poor return on marketing efforts, a February trading update downgraded revenue expectations by 10% and EBITDA by $5.5m (65%).
Of high importance for investors on the whole is trust in management. One of the quickest ways to lose the trust of investors is to not meet prospectus forecasts. After just 3 months TPW did just that: announced that the prospectus was a little too optimistic. I expect that the share price will not recover until management can bring the company back into break even territory.
Listed on the same day as Temple and Webster, Wellard (ASX:WLD) has also been a poor performer, losing 70% of shareholder value in 6 months. Some could argue that the Wellard IPO was somewhat opportunistic, listing at the top of their business cycle, which allowed management to reap maximum gain on their investment before the anticipated industry decline.
Wellard is a cattle export company that has been operating privately in Australia for over 30 years. Cattle prices are at an all-time high and demand for meat from Asia is strong. The IPO did not experience strong support and after encountering engine troubles at sea, Wellard’s distribution line was disrupted. Multiple profit downgrades followed. The company now finds itself with a stock price under $0.40, 70% down from its IPO price of $1.39.
Real Estate icon McGrath Limited (ASX:MEA) could also be argued to have listed at the top of their industry cycle, as there has been much talk of a property bubble forming in major metropolitan centres. The market seemed to agree with this sentiment as the stock price has drifted from its IPO price of $2.10 in December 2015 to around $1.00 in mid-June.
McGrath actually confirmed that it was experiencing difficult trading conditions in an April update, a decidedly different tune to what it was singing in December. I’m no real estate expert, but I would be surprised if there were nil market indications of this trend back in December.
Murray Goulburn Unit Trust
The last high profile company to have tanked is the Murray Goulburn Unit Trust (ASX:MGC), the owner of milk brand Devondale, who listed at $2.10 per share in July 2015. They traded sideways for most of the financial year until a trading update in April 2016 saw the price fall almost half, and it is yet to recover.
I don’t suspect any untoward activities, but it reinforces the business model they operate under which puts the dairy farmers needs ahead of shareholders. Similar to Wellard, they were also experiencing record high prices for their commodity and even though Wellard’s problems that caused the downgrade were not actually related to the price of their product, Murray Goulburn’s were. As the farmgate milk price began falling, so did their profits.
The common themes to be taken from these 4 IPOs is a combination of having a solid base of earnings for your investment and taking external industry forces into account when doing your analysis. With particular emphasis on the market forces that influence the industry and at what stage of the business cycle the company and industry are in.
To learn the other principals of value investing that Farnam follows for our portfolios, click here
Disclosure: Farnam participated in the Wellard IPO and has since sold its position.
This document has been prepared by Farnam Investment Management Pty Ltd (Farnam) ABN 15 149 971 808 AFS Licence 430574. While every care has been taken in the preparation of this document it does not contain any recommendations to buy or sell any particular stock(s) noted. Farnam makes no representation or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. The information in this document is general information only and is not based on the objectives, financial situation and needs of any particular investor. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Past performance is not a reliable indicator of future performance. The information provided in the document is current as the time of publication.