Culinary convenience no guarantee of share market success
By Mark Brighouse, Chief Investment Strategist
08 August, 2017
The idea of prepackaged "meal kits" that are delivered to your door is a global phenomenon. They take the stress out of deciding what to have for dinner and ensure that the customer has all the fresh ingredients, in the right proportions that they need for feeding their family.
In New Zealand, many people are customers of brands like My Food Bag, Bargain Box, Just Cook It or WOOP. In Australia, there are dozens of companies offering such services and in the US, there is estimated to be more than 150 meal kit delivery services.
When the first of these companies listed on the New York Stock Exchange recently, there was a great deal of interest. Blue Apron Holdings initially indicated that its shares would cost between $15 and $17 in the offering but reduced this range to $10 to $11 based on investor feedback. The deal was finalised at a price of $10 per share but even this lower price did not guarantee a successful listing.
The shares declined 20% over the first week and then took a further hit when Amazon announced that it would acquire grocery chain Whole Foods (indicating that the mighty Amazon could now easily enter the meal kit market themselves). At the time of writing the shares are trading at $6.70 (about a third of the value that the top of the initial range suggested).
This saga provides a useful reminder of why buying into new listings is not always a recipe for making money. We always believe that investors should have a high bar for evaluating IPOs because they don't have a track record as a publicly listed company. It also reminds us that just because they are the only listed company in an industry doesn't mean that they are without serious competitors. Such competitive threats can come from companies that are in similar industries and have the capability to easily move into adjacent markets.
When you buy shares in an established listed company you are likely to be buying from someone who has arrived at a different view based on the same information that you have. But with an IPO you are likely to be buying from someone who has owned the business for a while and who knows all about the challenges it faces and the weaknesses it has.
So given the smorgasbord of investment opportunities available out there, there is no need to treat new IPOs as something special that must be consumed straight away. IPOs will always have rosy short term prospects and while the prospect of gaining from the first day "pop" that IPO shares often experience is tempting, be sure to do your homework. Asking yourself what is so special about this company is a good place to start.