Don't forget the golden rule: if it's any good, you won't get offered it.
OF THE 32 floats this year, 22 are under water, three are breaking even and only seven have made money. This month the $1.3 billion Valemus float was pulled after the market fell 15.7 per cent between launch and listing.
On top of that, the general float sentiment is still struggling after that fabulous marketing success, the Myer float.
Myer listed in November at $4.10. It is now trading at $3.42, about 20 per cent below the issue price. At one point it hit $2.86, down more than 30 per cent, delivering a combined loss to its shareholders of more than $721 million.
You wouldn't worry, except that it went almost exclusively to Myer One cardholders (customers) and employees - hardly the best people to upset for the sake of the business. They are still down $395.4 million between them.
Myer is a classic example of what the financial industry does best - marketing. The private equity guys, having bought it for $1.4 billion in June 2007 - just before the global financial crisis - must have thought their goose was cooked. But somehow they managed to sell it back to us after the crisis for $2.38 billion.
Myer's value had apparently risen by 70 per cent while the sharemarket's had dropped 26.7 per cent, and the private equity investors and the Myer management walked away with a remarkable profit in a difficult time.
And to think they were selling the ability to apply for the float as a privilege for Myer One cardholders. Joke. Not quite a RAMS Home Loan magnitude joke, though. RAMS went from $2.50 to 20¢ in five months - perhaps the most masterful piece of float timing ever.
Despite all this, a lot of us still harbour the idea that floats are some sort of giveaway and that being offered one is like being offered cash. It is a hangover from better times. In the present volatility, floats are risky for the seller and buyer.
The way floats work is that the brokers selling them genuinely want to make everyone happy. That includes the company that is listing (their corporate client) and the potential new investors (usually their broking arm's client base). The way they do that is to price the float a little bit (5 per cent maximum) below what they think it is worth. The plan is that everyone makes money on day one - the new investors and the corporate client. If they have managed the expectations of their corporate client correctly, they will be.
Where it goes wrong is when a company is trying to sell a float in a volatile market, as we found out with Valemus.
For the broker managers of the float to ''price in'' a 5 per cent turn for initial investors (the tradition), they need stable and bullish markets between launch and listing. The present volatile sideways markets, with Wall Street dropping or rising sometimes 3 per cent in a night, are a killer for floats, the lead time is too long and the pricing so impossible to get right. The result, for companies and investors alike, is a crap shoot.
Obviously, one day, a stable bull market will return and brokers will be able to manage floats incorporating a ''premium for all'' once again. But, until then, here are a few tips:
■ A sure sign to avoid a float is when a mid-cap stock is being offered by retail broker X but the broker to the issue is massive broker Y. If a big broker has to offer a commission to another broker to sell it, they're obviously having trouble shifting it.
■ Remember that when someone is trying to sell you something with a glossy brochure, it is because they are trying to glamorise the value of what they are selling, not hide it.
■ The better the marketing, the higher the price and the worse the returns to investors. The golden rule of floats remains. If it's any good, you won't get offered it. If you get offered it, you're either a privileged client or you don't want it. Are you a privileged client?
Marcus Padley is a stockbroker with Patersons Securities and the author of the daily sharemarket newsletter Marcus Today. For a free trial, go to marcustoday.com.au
