As an investor eyeing up an IPO…do you understand the nuances of how best to trade it? Today
we’re going to look at some important considerations for IPOs and apply it to Albertsons Companies.
Albertsons had their IPO and like a lot of communities this year on the 4th…there weren’t
any fireworks…so what happened? Well in this video, I’m going to try and answer
that by taking a thorough look at the company’s first couple of weeks of being publicly traded
and let you know why I believe it didn’t take off and what to expect over the next
few months. And if you are still debating if you should invest in Albertsons , I’ll
provide you a time you might consider getting in based on some knowledge of the IPO process
that I’m going to share. So, as we get settled into this discussion, it might be a good time
to hit that like button to get us warmed up! Welcome to Healthy, Wealthy, and Wise. I’m
Kevin…and on this channel, we talk about little things that can lead to big improvements
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So I know many of you have been disappointed by Albertsons’s share price performance
over the first couple of weeks of being a publicly traded company. My goal today is
to explain in detail how the typical IPO process works and apply it to Albertsons. Hopefully
this will help you in deciding if Albertsons is a company that you want to be invested
in either in the long term or short term and also to help manage your expectations. Before
we get into it, let’s start with some positive news for the company and its investors, and
that is that Supermarket News named Albertsons its Retailer of the Year for 2020. Some of
the reasons noted for the recognition were its sales momentum, its strong response in
the pandemic, promoting diversity, and its technological advances. If you have, or are
interested in investing in Albertsons, you have to like that an external organization
familiar to the industry provided some kudos to the company.
Now in past videos, we’ve talked about the pros and cons of investing in Albertsons and
the grocery store industry; if you haven’t seen them yet, I would recommend checking
them out, particularly the one in the upper right hand of your screen. Today, we’ll
discuss more about the IPO process in general and how that has impacted the Albertsons share
price…and why it may not be as disappointing as it seems. Upfront, please remember that
I’m not a financial advisor and I am not providing any financial advice for you to
act on, just sharing my own thoughts, knowledge, and experiences. You should always do your
own research and consult with your own financial advisor when making investment decisions.
Let’s get started! So when a company decides to go public with an IPO, you need to realize
that it’s more than a 1 day or a 1 week process…in fact, it covers many months.
And there are some rules that the company has to follow—and these rules are really
important to be aware of as an investor. One of the rules is that the companies need to
have a quiet period that takes place before and after the IPO. It begins when the registration
statement is made effective and lasts for 40 days after trading begins. So in this time
period, the company insiders are limited in their ability to market the company before
the IPO takes place and then, afterwards, they again are not able to provide any guidance
on financials, such as on projected earnings, expressing opinions on the company’s value
or on any research reports. The reason for the quiet period is to try to mute any attempts
to move the stock in a way that causes conflict of interest questions, such as accusations
of attempting to manipulate the share price. So for Albertsons, this quiet period is super
important. As we’ve mentioned before on the channel, this type of company’s stock
price is not going to surge on expectations, it just isn’t. After all, it’s an established
company in a competitive, well-studied industry where growth is slow and steady versus being
fast and explosive. Even in the pandemic environment where sales rose, so did expenses in areas
such as cleaning, getting products from their distributors, and paying their employees bonuses.
It’s also not the sexy new tech stock that everyone believes is going to change the world,
even if in reality, many of those tech companies never do. What it is, is a company that has
a long history to be judged on in an industry where margins are tight and growth comes incrementally
at best. Now the good news is that it’s a company less likely to burn out like the
latest tech darling, but on the other hand, the stock is only going to move on news and
financials…not on big expectations. And when you have a quiet period, guess what?
There is no news or financials, so the stock is going to be limited in moving, particularly
up. In fact, the last big news of the company is that its IPO underperformed expectations
and I would guess this sentiment has lingered and kept the share price depressed. However,
we just learned on Tuesday that Albertsons will release its financial results for their
first quarter which ended on June 20th in which they will report before the market opens
on July 27th. If you’re following the company, this is something you’ll want to be sure
to catch so you can get a better idea of how the company is doing.
The next thing to consider is potentially good news…if you take the perspective of
being a long term investor as compared to a short term trader…and that is that the
company’s set IPO price by the underwriters…that $16 price vs. the 18 to $20 range that the
company originally proposed, has been fairly close to where the shares have been trading.
Now, in 2020, on average, IPOs have popped 20% on the first day…as a shareholder, that’s
great, but it’s actually somewhat negative for those companies’ pre-IPO investors because
they lost potential capital at the IPO. In Albertsons case, while the shares are currently
trading somewhat below the IPO price, the share price indicates that the underwriters
valued the company pretty accurately looking at the financials such as earnings, their
infamous debt load and also knowing the industry. That’s an important consideration, but that
doesn’t mean that the stock price won’t potentially take a hit a little down the road.
We’ll talk about that possibility in just a bit. Now thinking about an IPO in general,
many times, at least a part of the proceeds goes towards growing the business. In Albertsons
case, that didn’t happen; all of the proceeds went to the private firms that had invested
in the company prior to the IPO. So from a potential investor’s viewpoint, this could
negatively impact their view of the company going public as they may see the IPO as being
more of a money-grab as opposed to seeing that the new money is being put to work in
growing or improving the operations of the company. This can further define the company
as one with low growth potential, whether that’s accurate or not. That perception
will also tamper enthusiasm for the stock, and probably another reason for the lackluster
share price performance. Next up is one of the most important things
to know about IPOs and that is of the lockup period. If you’re not familiar with this,
it’s the period of time that the company stops pre-IPO investors from selling their
shares after the IPO and therefore flooding the market and ultimately diluting the share
price. For a typical company, these number of pre-IPO shares can be around 80% of the
company’s total shares versus the public offering shares which may only amount to 20%
of all shares. The idea of the lockup period is to help stabilize the price of the stock
as investors begin to get a better understanding of valuation in regards to the overall market.
Again, the main point is that it looks to limit the share price from dropping due to
a glut of shares hitting the market at the same time. The lockup period of time can vary,
but it’s always reported in the SEC filing by the company. From an investing and trading
perspective, the important thing to keep in mind is that it’s typical for most companies
to see a drop in the share price once the lock-up period ends as long term investors
look to seek some return from their investment in the company prior to the IPO.
Now you might be asking how this lockup period might keep all of the shares from eventually
being dumped 3 to 6 months down the line. Well it potentially won’t, however, based
on how the company is doing and how the share price has reacted since the IPO, some investors
might be willing to hold onto some shares longer than they planned. Also, there are
some pre-IPO investors that have further restrictions on when they can sell…again, this will be
found the SEC filing. So how does the lockup period relate to Albertsons?
Well, the first thing to know is that in the SEC filing, Albertsons stated that their lockup
period would be for 180 days from the date of the prospectus which was signed on June
18th. There are also some other restrictions for certain investors, called preferred investors
in the filing, but to make it easy for today, lets’ just focus on the 180 day or 6 month
lockup period. It is definitely important to keep this timeframe in mind, especially
if you’re looking at trading Albertsons in the short term. What you’re liable to
see…and I’m not predicting the future and I’m not saying it will definitely happen,
is that the share price will likely start to drop in anticipation of these pre-IPO stockholders
selling some of their shares once the expiration date hits. The share price will be under pressure
through that time, however, if the company is doing well, the share price can definitely
recover; for strong companies it generally will, but even then, it often takes some time.
A recent well-known example of this was with Beyond Meat last year when the share price
plummeted in advance of the lockup expiration date and then also on the day of it.
So now you might be thinking you need to get out before the lock-up period…I bet someone
out there is putting it on their calendar when they need to sell. And while I definitely
think you should keep track of that date, it may not be automatic that selling is the
best option. For instance, you might want to hold your position if the company has a
strong next quarter which will occur before the lock-up period ends and also if the company
gives encouraging guidance, which being that it comes from the company itself, you always
want to take that with a grain of salt. But still, they don’t want to get a reputation
right off the bat of providing bad guidance because that will further drive investors
away from their stock. Another thing will be if Albertsons makes good on its intention
to provide a dividend. Unlike growth stocks which need the share price to grow to make
investors happy, a company offering a dividend gets more slack as long as the share price
doesn’t drop dramatically because they can still make money from the quarterly payout.
And then the last thing you might want to consider is of the share price heading into
the lockup expiration; if it’s close to where it is now, the pre-IPO investor may
want to hold onto to their shares longer than if the share price had doubled or tripled
since the IPO when they might be more ready to take some significant profits. Even though
they likely paid much less than the IPO price and would profit some anyway, if they have
confidence in the direction of the company, they may continue to hold those shares longer
waiting for value to go up. But preparing for the date of expiration is
not enough, there are some more things to consider based on what actually happens. As
the time gets closer to the expiration date, you’ll want to watch the share price…if
it starts to dramatically drop, that means that there is an expectation that the pre-IPO
investors will be selling off big. If the drop isn’t dramatic, then there may be confidence
in the current trading levels and that there won’t be a huge sell-off of pre-IPO shares.
But once the date hits, we will actually see what those early investors end up doing…if
a lot of shares are sold, it could indicate either that they may not have faith in the
company particularly if the share price is close to where it is today. Or it could mean
that they are looking to take profits…how much selling occurs and what the share price
does will be telling. Now on the other hand, if a relatively small amount of shares are
sold, that could really indicate that those early investors, and most likely insiders,
are feeling really good about the company and are looking to stay invested, which could
help determine a level of support for the share price. So watching what happens during
this pivotal time could really help you in figuring what you think about the stock and
its value. And if you’re someone that hasn’t yet jumped into a position or are considering
buying more shares, you could watch the lock up expire and likely pick up some shares at
a discount to where they would have been trading going into to the expiration date.
Well, I hope that helps to give you a better understanding of the IPO process and how that
knowledge might help you better trade the stock. Did you find this helpful? If you did,
let me know in the comments and, also, please be sure to hit, smash or even tickle that
like button. And if you haven’t subscribed yet, what are you waiting for; we’d love
to have you onboard. As always, I hope that we can all learn from each other on how to
take little, easy steps in making big improvements in our lives. Thank you again for watching
and until next time, have a great day!