Investors leaving an unsuccesful issue

Issues in 2016


During the past 12 months all but one company in my portfolio made issues. This is Fortnox. AroCell did last December and the rest throughout the year – some more than once. Of the 11 shares in the portfolio 6 have made public issues, 2 issues on basis of warrants, and 8 were private placements.

The long term investor has to make choices, then. First, when to participate? Second, how much of my saving will I direct towards high risk investments? Third, if an issue is not fully subscribed, does the long term case still stand?

When to participate?

For my part I have participated in all the possible issues during 2016 in the companies of my portfolio. That is, except warrants I had in IVISYS – I’ll come back to that later. In other words, I have in effect enlarged my positions throughout the year in half of the companies.

Every time there is an issue, the share price is slaughtered. At the latest issue, Heliospectra, the price before the issue were around 10 SEK, now it is below 7.50 SEK. In CybAero the price was above 12 as the issue was announced – today the price is below 3 SEK. Often the share price takes a long time to recover, unless it is one of the issues that are 300 or 400 % oversubscribed. This year I have not been that lucky.

From time to time I have asked myself if in fact participating is like a gambling psychology: I’ll play some more to gain what I have lost.

In general, I tend to view my investments over 3-5 years. Therefore, I am to some extent immune even to large month-to-month fluctuations. But on the other hand I hate to see that my portfolio as a whole is losing value. It is a bad investment strategy to keep portfolio value by throwing in extra money – but that is in fact what I have been doing during 2016.

Savings and high risk investment

This bring me in to the next topic – how large a portion of my savings I should direct into a high risk portfolio. The high number of issues during 2016 have had two results. First, that I have not had funds to participate in new IPOs and second, practically all my savings in 2016 have gone into the portfolio.

The last month or so I have evaluated my portfolio in terms of development stage. It is my aim to spread risk by having companies at different developmental stages. I use my EGS-model to evaluate. I evaluate both the development stage and the financial state. In my current evaluation I have asked myself the question: Does the portfolio contain companies at different development stages – in order to spread out risk? My answer is yes, at one end there are A1M Pharma and Cantargia still far from market and on the other Fortnox paying out dividend. In between are Recyctec expectedly reaching break even in 2017 followed by Dignitana, Nexam Chemical, perhaps Heliospectra (in no specific order) in late 2017 or 2018. When it comes to spreading risk, there is no problem in the absence of new companies.

When it comes to the amount of savings going into the portfolio, there is no doubt that 6 issues and 2 rounds of warrants are very close to my limit. I cannot do that again next year unless one of the companies are bought. Today’s risk profile of my total savings compared to same time last year today are much riskier as a consequence of the number of issues.

Unsuccessful issues

Another aspect of risks involved in issues is only partly subscribed issues. CybAero was the last example of this. Only 80% of the planned shares were subscribed. The problem both concerns the share price psychology and the ability of the company to develop according to plans and strategy.

Psychology first. For CybAero investors the 80 % subscription were costly since today the share price is 2.88 – compared to an issue price of 4 SEK in November. In June A1M Pharma made an issue where the subscription amounted to 63 % and the guarantors needed to take the rest. The subscription price was 2.60 SEK – today the price is app. 2.30 SEK. In both cases today’s price is significantly lower than the subscription price.

Share price in growth shares are determined by mimetic desire in the absence of a financial track-record. In short, I desire what others desire. A classic band wagon phenomenon, in other words. Hence the picture of sheep above.

This also works the other way round. If nobody wants a share, then I have to sell or abstain from buying. And an unsuccessful issue is the ultimate sign that others do not desire a share. This adds an extra layer of risk on issues, because they constitute an ‘exam’ for the share. If it does not pass, the punishment is immediate and severe. The sheep are leaving.

… and in real life

In real life, an unsuccessful issue poses a problem too, since it makes it harder for the company to go ahead as planned. This could be the case for CybAero (but not for A1M since the guarantors bought the not-subscribed shares). In my evaluation after an unsuccessful issue I look at the overall case. That made me sell my IVISYS shares in spring. The share price was well below the subscription price of due a warrant series – and nobody subscribed. At that point I lost faith in the overall case, since they lacked the expected funding to go ahead. In their listing documents breakeven was expected in 2016 and turnover to be 40-50 MSEK. After Q3 the turnover was 217.000 SEK.

I still keep my shares in CybAero, though, as they reached 90 % of the planned funds. Probably they can do with minor adjustments. My evaluation is at the difference in share price before and after the issue – from 12 SEK to 3 SEK – does not reflect a real change the business possibilities of the company. I see that as mainly psychology driven.

To conclude

Well, during 2016 issues have made my savings riskier, have consumed almost all my spare savings and cut heavy slices of the share price. This calls for a participation halt. On the other hand, it is important take a step back and see the larger picture. Which is that I have bought BrainCool at 4-5 SEK (9.90 today), Dignitana at 6-7 SEK (19.30), Phase Holograph at 7-8 SEK (26.5), and Fortnox at 9 SEK (30,0).

Check out my growth share portfolio, the share price trigger list or my EGS (Evaluation of Growth Shares) Model.


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