An increase in market risk aversion, or a couple of negative company headlines, can often cause a newly listed stock to decline to a fraction of its IPO price while the company’s underlying business prospects continue to improve.   These stocks can bounce back and give great returns to investors who buy them near the bottom.

Examples of this are Diligent Board Member on the NZX and Onthehouse Holdings on the ASX.

Diligent, which has developed a cloud based facility that allows company directors to view their board papers online, listed on the NZX on 14 December 2007 after issuing new shares at $1.00 each.  Its shares closed that day at 80 cents after investors reacted negatively to the non-disclosure in the prospectus that CEO Brian Henry was a director and significant shareholder of Energycorp, one of New Zealand’s high profile company failures in the late 1980s.  Henry resigned on 13 December and was replaced by current CEO Alex Sodi. 

This non-disclosure and CEO resignation put doubt in the minds of many investors and encouraged them to sell Diligent shares on their day of listing.

Once a new listing gets off to a poor start it often takes a long-time for the fall to stop.  Diligent shares hit a low of just 7 cents in March 2009 and have since recovered to $2.86, a return of 3,986% from the bottom.  The company now has 1,026 clients compared to 65 at time of listing and posted a net profit for the year ended 31 December 2011 of US$2.2m compared to a $3.7m loss for the 2007 year.

Onthehouse listed on the ASX on 3 June 2011 also with an IPO price of $1 and closed at 91 cents that day.   Onthehouse runs, a start-up website that provides historical Australian house sales data amongst other services.  It also sells a real estate management computer software to real estate agencies.  The stock traded at 33 cents on 21 December before rebounding to 68.5 today.

There are three reasons Onthehouse was sold aggressively after listing.  Firstly the Company listed just before a major market sell off that caused the ASX200 All Ordinaries index to fall 8.2% from its time of listing to the year end.  Secondly a rumoured cooperation with a listed media company never occurred.  Thirdly, it is likely that many of the investors did not truly understand the business and when global markets began to fall they ran for the hills.  Monthly visits to have increase from 446k at time of listing to over 1 million currently.  The company has also reaffirmed prospectus earnings guidance and signed a sponsorship agreement with ASX listed Suncorp that will help leverage the website.

Of course there are many new listings that perform poorly and never recover, the above examples are two notable exceptions.  Investors must remember to look at the fundamentals before joining the crowd and selling.  A stock that has been sold while fundamentals have continued to improve may be the next big winner.

Discolsure:  Milford Asset Management owns shares in Diligent Board Member and Onthehouse Holdings.

William Curtayne