Tempted to take a spin by buying stocks in BRP Inc.? It makes Ski-Doo snowmobiles and Sea-Doo boats.
Summer is making its long-awaited arrival, and for some Canadians that means camps and cottages, and maybe even a new Sea-Doo to zip across the water. If you're a fan, you might have considered buying shares in the Quebec company that makes them.
BRP Inc., the maker of Sea-Doos, Ski-Doos and all-terrain vehicles, began trading on the TSX late last month, raising more than $260-million in its market debut. It was the first high-profile new listing in several months in Canada, and while it didn't spark the frenzy that greeted the initial public offering of Facebook a year ago, it has consistently traded comfortably above its issue price, causing some Canadians to wonder whether jumping on board IPOs can rev up their portfolios.
"IPOs generally carry a bit of a mystique to them, since [previously] the companies haven't been available to invest in," says David Menlow, president of IPO Financial Network, a U.S.-based research firm.
While he can't point to studies or quantitative research about the overall performance of newly listed stocks, Mr. Menlow says there are some factors that favour IPOs.
"The capital infusion a company gets by going public can a have a dramatic effect on its growth – like a shot of adrenaline to the heart."
Mr. Menlow also says investors should be able to buy shares of a new company at a relative value price, since IPOs are generally priced at a discount to their peers, to help them get sold, and increase in price once they begin trading.
However, there is another issue when it comes to investing in IPOs. It is very hard for individual investors to have an order filled for "hot" new listings – but brokerages are all too keen to sell their customers shares in companies with less cachet. As Mr. Menlow puts it: "If you want it you can't get it, and if you can get it you don't want it."
The "hot" IPO that immediately jumps dramatically in price seems to be mainly a U.S. phenomenon. That may have to do with the nature of our capital markets, as well as the smaller number of Canadian companies in sexy sectors such as technology. But money managers such as Norman Levine don't feel they're missing out. Mr. Levine is a managing director at Portfolio Management Corp., a Toronto investment firm.
"We don't do much investing in IPOs, for a few reasons," Mr. Levine says. "IPOs in Canada are usually priced to benefit the seller, not the buyer. Underwriters push up the listing price so the company gets maximum value, not leaving much for investors. It's different in the U.S., where prices are set with more room for initial increase."
Mr. Levine also has concerns about the liquidity of IPOs in Canada, since many companies sell only a modest percentage of the company to investors, meaning fewer publicly traded shares, and possible difficulty when it comes time to sell some (or all) of his firm's position.
David Baskin, president of Baskin Financial, an independent investment management firm, also finds IPOs are seldom a good fit for his clients.
"We invest based on financial statements and track record of companies, including the trading of the stock. So that makes it hard for us to invest in IPOs."
Mr. Baskin notes if it's a good company, investors won't miss much by waiting until the stock trades for a while. "We're not in the excitement business," he adds.
However, Bruce Campbell isn't about to rule out buying new listings.
"Investors should consider them, just like any other possible investment – but with some caution," says Mr. Campbell, a principal at Campbell Lee & Ross Investment Management, an independent private wealth management firm based in Oakville, Ont.
One red-flag situation for Mr. Campbell is private equity firms that are selling a company through a public offering.
"You have to wonder why they are selling," Mr. Campbell says. "Is it because they think it's fully valued?" On the other hand, when a buyout firm only gradually sells parts of the company in stages, it can be a solid performer – Mr. Campbell cites Shoppers Drug Mart Corp. and Dollarama Inc. as two such examples.
Like Mr. Levine, Mr. Campbell favours American listings. "U.S. IPOs usually do better than Canadian – they tend to be priced to leave more room for appreciation, they are more liquid, and Americans love them."
Investment professionals agree that individuals need to do their homework before buying into any IPO, including an analysis of the track record and financials of the company, the experience of management, and a comparison to valuations in the sector. As well, it is crucial to fully understand the nature of the business or service the company offers.
"There are a lot of esoteric IPOs – companies working in technologies that are not easily definable," says Mr. Menlow at IPO Financial. "If an investor buys into that kind of company, and there's a shift in technology, they won't realize it, and may end up owning a stock in a downdraft that never comes back."
As for Sea-Doo maker BRP, none of the money-managers interviewed for this article were tempted to take a spin. Mr. Campbell says his firm "looked at it" but didn't buy, in part because of the inconsistent "lumpy" nature of its sales.
Mr. Baskin notes BRP is in a very economically sensitive industry. "You don't buy Sea-Doos when the economy is lousy."