Blogs & Comment

Should you buy an IPO like Dollarama?

Dollarama, the largest chain of dollar stores in Canada, is doing an initial public offering (IPO) of shares. Blogger Canadian Capitalistasks: Should you bite?
As I understand, much of the merchandise sold by dollar stores is imported from China. My worry would be that this source of cheap wares could dry up because of a substantial appreciation in the yuan over the next several years.
The preconditions are in place: China has a huge surplus in its balance of trade and more than a trillion of U.S. dollars in foreign currency reserves. This creates a huge imbalance for the world economy and China itself. Trade frictions and protectionist measures are on the rise, as are calls for China to unpeg its currency.
Then there is the advice in many investment guides to avoid IPOs:
Most new issues are sold under favorable market conditions, which means favorable for the seller and less favorable for the buyer. Benjamin Graham, The Intelligent Investor
the major sellers of stocks in IPOs are the managers of the companies themselves. They try to time their sales to coincide with a peak in the prosperity of their companies or with the height of investor enthusiasm for some current fad. Burton Malkiel, A Random Walk Down Wall Street
investing in IPOs is much akin to playing the lottery . For 29 out of 33 years [1968 to 2000], IPO portfolios underperformed a small stock index. Jeremy Siegel, The Future for Investors
The returns on IPOs are ghastly. In 1991, academician Jay Ritter objectively confirmed that the shares of new companies are a raw deal for everyone but the underwriters. He found that from 1975 to 1984, IPOs returned 10.4% while the market returned 17.4%…. Ritters conclusions have since been confirmed by others . William Bernstein, The Four pillars of Investing
New issues are typically well promoted. My experience is that you can buy nine out of ten new issues at a lower price a year or two later. Companies usually go public only when they can get a high price at the outset. Because of this I generally avoid new issues .”Stephen Jarislowsky, The Investment Zoo.
Butthere may be an exception to the rule. The first wave of IPOs that come out after a recession/bear market (like now) may be able to outperform, according to some academic research.
Update:Thicken my Wallet did a post on IPOs on Oct. 7.The title is ‘Why catching IPO fever will make you sick’