Sometimes a stock can mow market hopes down, and you wish you’d slipped into shorts, says The Secret Broker, rather cryptically.
Every so often a runt of a stock comes along.
You end up long and always underwater … and when some good news comes out they rally but never enough to give you a profit.
On bad days they fall more than others and on good days they never quite seem to rally as hard as anything else.
One of those stocks, in your Broker’s opinion, is APM (ASX:APM) or APM Human Services International Ltd, as its official title goes by.
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When you read its announcements, it always uses fluffy words which do not mean much to the market. But for government employees, they slot straight in.
All of APM’s announcements proudly pronounce at the bottom that it has 1600 branches internationally and that it employs more than 15,000 people worldwide.
Now that may resonate with government departments, but not with the market.
Charlie Munger would be spinning in his grave if you presented to him (somehow) all of the numbers that spin out of the APM machine.
On Thursday, its stock fell by over 39 per cent, when reality and not spin, finally hit home.
APM’s ratio of employees/offices worldwide/EBIT figures just did not live up to its valuation or market hype/expectations.
The company completed its IPO at $3.55 a share for a valuation of $3.25 billion and closed on its first day down 6.2 per cent.
When a big company doesn’t close above its IPO price, it normally means it will take a long time to ever rally above it.
So, from day one, its valuation came in at 6 per cent lower and then fell another 6 per cent over the next few days.
Now, I don’t want to burst a few bubbles here and if you run some Australian equity funds, you may even want to look away.
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In the world of IPOs and placements, funds have to take the good with the bad.
If you are a merchant bank and offer a few mixed deals throughout the year to your clients, then they have to take them all.
The good, the bad and the ugly.
Each one of them.
If they don’t, then they will be pushed down the meet-and-greet list and the allocation list.
So normally, when an IPO listing falls, it’s those funds just liquidating.
Get out for a 6 per cent loss on day one versus a listing that jumps 30 per cent on day one.
It’s a no-brainer.
If a broker is involved in the IPO, then they won’t get the “sell and get out of jail” order to put into the market, as it is not a good look for the house broker to be a seller.
Being a buyer is okay; being a seller is not
It was interesting to read in the week how a couple of fund managers running a long/short fund had shorted Nuix (ASX:NXL) on day one, even though the hype meant their big clients were asking them if the fund was buying any shares.
They just had to keep quiet, as their research meant that they saw it as overvalued and, in fact, they were shorting it big time.
They went through a bit of pain before their shorting gain, as the honeymoon period kept things rosy, market-wise.
As for APM, recent whispers were it was just waiting to secure some more long term government contracts worth $11 billion or so and then the stock would take off.
All of its senior management are “believers and followers in the stock” – not surprising as it’s safe to assume some are long of some long-term incentive options.
When I was doing a bit of background, I discovered that some of those incentive staff options run till the year 2037!
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I have never seen this before and in a type of company that is just service oriented (it doesn’t produce anything in the real physical product world) you can see why all the senior managers spend all day humming the Monkees. They’re locked in!
“I’m a believer, I couldn’t leave her if I tried”
Here is a chart of how APM performed from when they first listed. You can see the waves that I talked about:
This APM graph has an interesting shape. Picture: supplied
Its current liabilities (including leases) of $800 million, now exceeds its current market valuation, at 82c of $720 million.
In my experience, it will have to dig deep and find an unpolished diamond in its kitbag.
It could be all the data that it produces from all of its clients or a bit of software that it has developed which may be useful to other industries.
Who knows? What is obvious to the market is that they are going to have to tweak their current offerings if they want to garner any confidence back into themselves.
Let’s hope that, for the sake of their 15,000 employees, they do find that diamond.
And it’s not a synthetic one, covered in fluffy words.
The Secret Broker can be found on Twitter here @SecretBrokerAU or on email at [email protected].
Feel free to contact him with your best stock tips and ideas.
This content first appeared on stockhead.com.au
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