It's Raining IPOs! Should You Chip In?

Wed, 1 Mar Pre-Open

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Name some ways to make a quick buck in the stock markets. I'm sure initial public offering (IPOs) are on your list of answers. If the recent past is any indication, IPOs in the Indian stock markets seem to be easy money. They were handsomely oversubscribed. And retail investors were the ones who ran with buckets (rather than thimbles).

Seems that the above trend is only going to get trendier in the coming days. We know of half-a-dozen companies set to raise Rs 60 billion in March or early April through IPOs. And this will make for the second best month for IPOs in the past six-and-a-half years.

The above list includes companies such as Music Broadcast, Avenue Supermart, Central Depository Services, S Chand & Co, Continental Warehousing Corporation, Security and Intelligence Services, Housing and Urban Development Corporation, and Shankara Building Products.

So far, so good. But, as always, when something is too good to be true, there's a catch. The euphoria around IPOs begs the question: What should our approach towards IPOs be?

We believe you should not get swayed by the buoyancy surrounding IPOs. Instead, like with any stock, look for the fundamentals of the business and the attractiveness of valuations in IPOs as well.

We, at Equitymaster, have always recommended IPOs cautiously. Here's Rahul Shah, co-head of research at Equitymaster, explaining our rationale behind the approach:

• 'We know what a dirty game the IPO business is. We've seen it over and over again: It's a game where the odds are stacked against investors. So for us, the equation is simple. We'd rather face criticism in the short run than see our subscribers lose money over the longer term. We weren't afraid to do this during the hot IPO days of 2007, and we're not afraid to do it today.'

The Bottomline: You need to evaluate each IPO on its merits by considering its fundamentals, and most importantly, the valuations. And this is particularly important when the hype surrounding IPOs is at its peak.

The 5 Minute WrapUp offers two ways to think about IPOs and explains how to profit from them. And if you wish to run IPOs through a handy checklist, you can download our Handbook of IPOs to pick only the right ones for you.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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