Friday, October 16, 2015

Why I lost money on this IPO from loyal3

I just lost $11.75 by participating in the First Data (FDC) IPO on loyal3. I had reserved the maximum $10,000 and got the entire allocation for 625 shares at the IPO offer price of $16 on Oct. 14, 2015. I held on for the first day of trading yesterday. (The stock reached a high of $16.41 near the open, then started dropping to as low as $15.65, so I did not sell as I did not want to lose money). Today, I put in my sell order after seeing the stock getting back to $16, hoping to break even. Unfortunately, the sale price was executed at $15.98, netting me proceeds of $9988.25 for my 625 shares. IPOs tend to have a pop on the first day and I have invariably made money with loyal3 by selling on the first day of trading. What went wrong this time?

Simply put, I missed several warning signs.

First, too many shares were offered. This was the biggest IPO of the year.

Second, the stock market is cooling off with most of the indices off their highs, so the demand for speculative stocks and IPOs is not there.

Third, the fundamentals are horrible. The debt of this particular company is overwhelming. The approximately $2.5 billion received from the IPO will be used to pay off debt, but this is small compared to the company's debt of $21 billion. FDC has an interest coverage of only 1, while only 3 companies in the S&P 500 has interest coverage below 1. FDC looks like a prime candidate for bankruptcy when interest rates rise and as it continues to lose money.

Fourth, it took days before the First Data IPO enrollment closed on loyal3. IPOs that have done well on loyal3 in the past were available for only an hour before enrollment closed. This was the first major warning of weak demand.

Fifth, the IPO was originally offered at a price range of $18-20. On the day of pricing, the IPO priced below range at $16. This was unprecedented in the history of loyal3 IPOs. It required confirmation, which I did, like a sheep led to the slaughter. An IPO pricing below range is a loud and clear warning of weak demand, and the smart thing would have been not to confirm my reservation.
I got my entire reservation. That never happened before on loyal3. My hope for a pop was quickly vanishing.

One or two of these warning signs above is probably not a big deal. Combined, they outweighed the odds that IPOs tend to pop on the first day. The CEO of FDC said he is "taking the long view". They tend to say that when there is nothing good to say about the present. And the foreboding thing is that the long term view of this company does not look good. So today, given the chance of breaking even, I am out. Live to fight for another day.

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