MARKET COMMENT
Using New Issues As A Buy Signal

By Stuart Watson (TMFTiger)
June 2, 2003

Back in October 2001, we ran an article highlighting the fact that a lack of flotations may indicate it wasn't a good time to think about selling shares. Most companies (and their advisers) look to float when they perceive share prices are high, as we saw from the surplus of new issues in the boom years of 1999 and 2000. So, if you like your contrarian indicators, one thing to consider is to look at buying shares when there is a dearth of new issues. That way, you are likely to get more bang for your buck.

As it turned out, thanks to the likes of Worldcom, shares did have further to fall after October 2001. However, we are seeing even less in the way of new issues. The Financial Times highlighted this morning that there have only been five new issues in the US this year. Between them, they have raised $1.1b, a fraction of the $12.4b raised in the whole of last year (which was itself the lowest level for a decade).

In the UK, the last company to join the main market was the insurance group Beazley (LSE: BEZ). It floated over six months ago and has done rather well, with its shares rising some 40% since then. However, another insurance firm, Benfield Group, is shortly to take the plunge and join the market. Its shares are due to begin trading, somewhat ominously, on Friday 13 June.

Benfield, a re-insurance specialist, is expected to be valued between £500m and £660m. It is coming to the market after a strong period for reinsurance premiums, in the wake of September 11, and had signalled its intention to float last November. Therefore, this float looks like more of a one-off event rather than the first of a rash of new companies coming to the market.

With precious few companies joining the main market and many leaving (either through acquisition, transferring to AIM or going bust), the number of UK firms with a London listing has shrunk from over 2,000 to around 1,700 over the last four years. There is still a surplus of tiddlers, though. At the end of March, around 45% of companies were valued at less than £50m.

With the flotation drought continuing, does it remain a good time to pick up some shares? The 3.5% dividend yield on UK shares still looks appealing when sat next to gilts and cash. But I for one am finding it harder to pick out bargains at the moment. Perhaps the flotation indicator is best suited as a guide to when not to buy. In other words, when new issues are all the rage, keep your money in your pocket.