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how to find a good ipo?

Wednesday, Jan 9 2019 9:06AM

How to find a Good IPO?
With IPOs flooding the equity markets, investors are spoilt for choice. Knowing which is the best IPO to buy can be tricky. Here are some evaluation criteria to help you identify a good IPO to invest:

Find good and best IPO

Business strength: evaluate the business model, management credentials, historical performance, and market position.

Growth potential: focus on growth potential as stock prices track revenue growth.

Promoter intentions: be sure that the promoters are not using the IPO to exit an iffy business.

Use of proceeds: invest in the IPO only if the funds are intended to be used for future growth, based on a strong plan.

Pricing: don’t overpay for IPO stocks just because the company is famous.

Business strength
Thoroughly review the company’s business model, management credentials, and historical performance. A good starting point when evaluating the best IPO to buy is the red herring prospectus. All companies undergoing an IPO issue this.

It contains most of the information you need to evaluate the company. The company’s website, annual report, and media reports are other sources you can refer.

Invest only if you are convinced that the company has a strong business model, financial health, revenue potential, and management quality. Also, consider factors like the company’s position in its industry and its unique attributes that give it an edge over competitors.

Growth potential
A strong track record does not guarantee strong revenue growth in the future. Since stock prices track future growth, the best IPO to invest in is one where the company has the strongest future growth potential.

Start your IPO investment analysis by evaluating the growth potential of the industry in which the company operates. Then, estimate how the company’s market share would grow over the coming years.

For this, you can use factors like how much the company is investing in technology, how is its innovation culture, what is it doing to expand its market, and how it is exploiting its identified strengths.

If you think the company is doing well on all these parameters, you may go ahead and invest in the IPO.

Promoter intentions
Nobody likes to exit their company while it is growing and profitable. So, check how much interest the promoter group is diluting before investing in an IPO. The law mandates promoters to hold at least 20% after an IPO. But promoters of successful companies have generally held significantly more.

If a promoter group is diluting its stake significantly, it can mean that the group no longer has faith in the company. It could also mean that it is not very keen on running the company for long, and may not give it the due attention. It could also be involved in some foul play.

You can quickly judge the management’s intentions by looking at what they are drawing from the company. A company that pays fat remunerations and large dividends to the management is highly suspect. Especially if the management is also significantly diluting its stake through the IPO. It is best for you to stay away from such a company.

Use of proceeds
You can find the intended use of the IPO money in the red herring prospectus itself. The best IPOs are ones where the funds will be used for growth-related investments, such as in new technology, entering new markets, setting up a new production facility, or acquiring other businesses.

These investments can increase the company’s revenue and profits, resulting in higher stock prices and more dividends. Make sure that the company has a strong growth plan in place and its intended use of proceeds is in line with it.

IPOs where the proceeds will be used to repay old debts, settling old claims, or making working capital-related investments may not be the best ones.

Do not make an IPO investment just because the company is famous. The company’s brand name is just one ingredient that distinguishes the best IPO from others. Popular companies can price their shares higher than they are worth and have oversubscribed IPOs.

You can estimate the fair price of a stock through a competitor analysis. Price-to-Sales and Price-to-Earnings are two of the most commonly used multiples for this.

You can calculate these ratios by dividing the price of a company’s stock by its sales per share and net income per share respectively. Both these figures are given in the company’s income statement. If these ratios are higher than those of competitors, the stock may be overpriced. You should avoid such an IPO.

Of course, there are times when the shares are priced higher because the company is actually better than its competitors. A thorough analysis of the company’s history and future prospects will tell you if this is the case.

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