Exploring the Viability of Flipping IPO

By The Boy Who Procrastinates - August 10, 2018


Among the various short-term trading strategies, there is one prevalent and yet controversial method that can be traced back to the origin of a stock being listed on the exchange. With new common stock issues closing as high as 200% on the first day of trading, it is of little surprise that many have turned to the flipping of IPO for quick and easy profit. 

Closer to home, a familiar and respectable figure in Singapore, Mr. IPO has devised the strategy of punting the IPO market and put forward a IPO chillies rating system to indicate the performance of IPO in the short run.

However, one might question the feasibility and soundness of flipping IPO as strategy of such nature seems to bear a more striking resemblance to speculation than to prudent investment management. This article aims to employ a statistical approach to investigate the viability of flipping IPO as well as the potential profitability of such method.


Flipping IPO

For the uninitiated, let's touch on the basic of the flipping IPO strategy. Before a private company gets listed on the stock exchange, an Initial Public Offering ("IPO") was undertaken in which the shares of the company are offered to the public for the first time. Investors can apply for the shares through online banking or via ATM during the IPO public offer period. If the application is successful, shares will be deposited to their CDP account. Typically, the trading of shares on the stock exchange commerces on the following business day.

In this scenario, a IPO flipper refers to someone who applies for an allotment of the shares during the offer period and sells the allocated shares on the stock exchange within the first day or week of trading. The flipper generally rides on the short-term volatility of IPO in the hope of making a quick killing. 

Private companies in general, are not legally required to disclose their company information and financial data. In order to be listed on the stock exchange, it is necessary for the company to issue a document known as prospectus. Investors commonly rely heavily on such documents on key indication of the company's financial position, business prospects, management team, key investment risks, intended usage of funds raised through IPO, etc.

Even so, it can be tedious to analyze the fundamentals of company given the limited historical information to draw upon. Under such circumstances, why would the opportunists be drawn to the risk of such untested stocks? Is the short-term speculative strategy of flipping IPO truly lucrative?



Performance of IPO on First Closing Day

Source: SGX

Taking a sample of 617 IPO on SGX that occurred since 2000, we are able to study the performance of IPO on the first closing day. The trend appears to be nearly normally distributed with a slight positive skew or tail on the right side. Majority of the IPO made a tepid debut on the Singapore Stock Exchange, falling within the narrow range of 0 to 5 percent gain.

The breakdown indicates that 69.37% of the IPO show positive post-listing performance at first-day closing, 24.96% close negatively and the remaining settling at the IPO price.

The graph above was plotted using Python Bokeh with the option of interactive tools at the side, best viewed on desktop. You may hover your cursor over the bar to view the number of IPO within each percentage gain/loss interval. The red bars represent the area of negative returns whereas the blue bars represent the area of positive returns.


Performance of IPO on First Closing Week

Source: SGX

If the investor was to hold the IPO shares longer till the first closing week, the landscape of the IPO performance will be slightly different. The normally distributed graph still has a positive skew on the right side. The mode is still in the range of 0 to 5 percent gains but it can be observed that the frequencies of the red bars are catching up. The number of IPO returning -5 to 0 percent is now a mere 14% behind its counterpart in the blue zone.

The breakdown reveals that 56.4% of the IPO close with an increase in its share price on the first week, 39.06% close lower and the remaining settling at the IPO price.


Long-term Performance of IPO

Source: SGX

Now, what will happened if the investor held on to the IPO shares until July 2018? The bar chart shows a declining trend in the order of increasing returns. It is alarming that the number of IPO with -100 to -95 percent return has the highest frequency at 95 out of 617, which equates to 15.4%. It is evident that the direction has now shifted to red's favour. For the scalability of the graph, I have excluded 16 outliers which returned in the range of 520% to 2000%.

Breaking down the number indicates that 29.50% of the IPO show positive post-listing performance until the recent month, 69.85% close negatively with the remaining settling at the IPO price.

The table below sums up the performance of IPO at the first closing day, first closing week and in recent month. The number of issues that close below the IPO price appears to increase when held on longer. The converse holds true as well. This probably elucidates the flipping behaviour by the opportunists within the first closing week. In the long-run, the performance seems to attest to the familiar shorthand for IPO that "It's Probably Overpriced".

*adjusted for rights issues / share consolidation / bonus issues


Viability of Flipping IPO on First Closing Day

Inspired by the Intelligent Investor, Chapter 6 Commentary, I am intrigued to figure out the outcome if an investor were to invest $1,000 across every IPO since 2000, at its offering price and sell it at the end of the first closing day.

To ascertain the viability of flipping IPO, I suppose it will be more pragmatic if the necessary fees that comes along with the application of IPO and selling of shares via brokerage are included in the calculation. The included fees are as follows:
  • $2 IPO application fee
  • Minimum commission fee of $25
  • Clearing fee of 0.0325%
  • SGX trading fee of 0.0075%
  • 7% GST chargeable on commission payable, clearing fee and SGX trading fee
For simplicity sake, the number of IPO shares purchased are rounded down and I assume that odd lots can be sold as well. Furthermore, I have excluded the new issues that do not offer public placement which trimmed the total number further down to 520.


Source: SGX

One may observe that the plot closely resembles that of its counterpart without the inclusion of fees with the normal distribution and a tail on the right side. However, one conspicuous difference lies in the mode of the graph. The performance of a great number of new issues falls within the range of -5 to 0 percent loss.

The breakdown reveals that investment in 60% of the IPO produces positive return on the first closing day whereas the remaining 40% produces negative return.

All in all, if the said investor were to invest $1,000 faithfully in every IPO since 200 and sell it at the end of the first closing day, he would have amassed $87,725.62 profit, a mere 16.87% return over 18 years.


Closing Thoughts

Statistically speaking, it might appear profitable to flip IPO on the first closing day at first glance, with 69.37% probability of the issue closing above the offer price. However, after factoring in the pertinent fees, the chance of such strategy producing negative return has risen to 40%.

Based on the results, the performance from employing the short-term method of selling the allotted shares right away in the secondary market is probably just slightly better than the odds in a coin-tossing contest. But of course, it is also essential to take note that past performance is not an indicator of future outcomes.

Nevertheless, it does not necessarily mean that we should not touch IPO with a ten foot pole. Benjamin Graham has mentioned in the Intelligent Investor that "it might seem ill-advised to attempt any broad statements about new issues as a class, since they cover the widest possible range of quality and attractiveness."

It is imperative to conduct your own due diligence and not ride on the FOMO trend blindly. Given the limited historical information on the company to draw upon, it is beneficial to always study the prospectus with a giant degree of skepticism. If you look hard enough, sometimes you may find a gem among the stones.

For blog posts with the "Programming Project" label, the relevant codes can be found on the GitHub page.  

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Disclaimer: All information in this post is published in good faith and for general information purpose only. The ideas and opinions expressed in this post are purely that of the author's and should not be used or construed as an offer to sell, a solicitation of an offer to buy, a recommendation for any security or as professional financial investment advice. 

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1 comments

  1. Hi,

    Can I request for you to provide links to your source data? Your findings are indeed enlightening considering it is in the Singapore context. I am impressed considering you managed to code tools to statistically analyse IPO performance.

    Thanks in advance!

    ReplyDelete