This is a guest market report by James Bowden, Investment Analyst at Stockomendation.
In the last few days newly-listed firm Cake Box (CBOX) has been making headlines, as its share price rocketed over 40% in the space of a few days since the company’s IPO last week.
Meanwhile, speculation continues to mount over the specifics regarding Aston Martin’s expected IPO later in the year.
With new listings making the news, this week we take a look at broker and tipster stances towards firms following their admission to the London Stock Exchange.
Using IPO data going back to the beginning of 2015, we retrieved broker and tipster recommendations in the calendar year following each new listing.
A 'Buy' or 'Risky Buy' rating is scored as a 5, a 'Hold' rating as a 3 and a 'Sell' or 'Avoid' rating as a 1.
The data throws up some interesting results, which are summarised in the two charts below.
Firstly, it is noticeable that whereas brokers typically don’t provide recommendations on new IPOs until approximately 30 days following the listing; in the most part due regulatory constraints.
In contrast, tipsters - unconstrained by regulatory requirements – begin coverage soon after a firm’s admission, and in a small number of cases this occurs on the same day that the company begins to trade.
The initial sentiment between tipsters and brokers also differs in the early stages of a firm's listing; whereas tipsters are more reserved – typically issuing 'Hold’ ratings – brokers are much more inclined to offer ‘Buy’ recommendations.
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This difference is amplified for AIM-listed companies, where the average tip sentiment score ranges between a 3 and a 4 for up to 60 days following the IPO.
The average broker ratings towards Main Market firms remain broadly consistent for the entire year; following an initial positive sentiment spike in the very early stages of broker coverage, sentiment ranges between 4.3 and 4.6.
Tipster sentiment, however, grows increasingly bullish as time goes on following the admission, with the sentiment score increasing from 3.7 on day one, to 4.2 one year later.
In the case of Main Market-listed firms the difference in opinion therefore reduces over time; tipsters and brokers appear to reach consensus.
The same cannot be said for AIM-listed firms.
The second chart shows that, whereas tipster sentiment follows a similar trend for AIM and Main Market firms, Brokers rarely tip anything other than ‘Buy’ ratings for new firms on AIM.
These ratings are in many cases awarded by the company’s brokers, and brokers will typically only take a company public if they like it, so these ‘Buy’ ratings are not surprising.
Further, as the number of ratings was small in this instance (89), due to the comparative lack of coverage that AIM-listed companies receive, positive ratings awarded by house brokers are not diluted by ratings from other brokers.
It does appear that Tipsters offer a much more balanced view of AIM-listed companies, providing a ‘bear’ case as well as a ‘bull’ case in many instances.
Interestingly, tipster sentiment peaks – with an average score of 4.2 - within the first three to four months following a firm’s admission to AIM, before tailing off to finish the year at a lower sentiment level (3.8) than the Main Market.
Following tipsters, therefore, appears to be the way forward for those looking for diverse opinion and differing viewpoints to aid their financial decision-making.
By James Bowden
Investment Analyst
Stockomendation
Stockomendation lets you performance-track over 37,000 stock tips, and see which companies and sectors are currently trending - find out more here.
Disclaimer: The contents of this article should not be considered financial advice. All information correct as of 5th July 2018.