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        IPO Advanced

        Views 8462022.09.21

        How to pick IPOs?

        Key Takeaways

        • A private company that offers its shares of stock to the general public is said to be making an initial public offering (IPO)

        • Some investors may pick stocks based on the company's fundamentals, valuation, and market sentiment


        Some investors may measure a company's fundamentals from four perspectives: how well its industry develops, its position in the industry, how fast the company grows, and its profitability.

        First, the industry's growth. Some investors focus on high-growth sectors with a relatively low market penetration rate.

        Second, the company's place in the industry. Some investors attach importance to industry leaders because a firm that can outperform its peers generally has competitive advantages and may be able to grab a considerable market share.

        Third, the company's performance. How fast a company grows can help determine whether it is a good underlying asset or not. If the company develops faster than the industry's average, it may show the company has some competitive advantages.

        Fourth, the company's profitability. There're several key metrics to consider: the gross margin (Gross Profit/Operating Income x 100%), the net margin (Net profit/operating income x 100%), the return on shareholders equity (Net Profit/Shareholders' Equity x 100%), etc.

        Three Valuation Metrics

        Valuation metrics are one of many tools that investors can use to help determine if a company may or may not be undervalued or overvalued. There are three widelyused stock valuation metrics.

        The first is the price-to-earnings (PE) ratio, which is calculated by dividing the stock price by the earnings per share or dividing the total market value by the net income.

        The second is the price-to-sales (PS) ratio, calculated by dividing the stock price by the sales per share or dividing the total market value by the total sales.

        Last but not least, the price-to-book value (PB) ratio, calculated by dividing the stock price by the book valueper share or dividing the total market value by the total book value.

        It must be noted that IPO valuation is very complex and not all companies can apply the above valuation metrics. When you value the company according to your own perception, you can compare it with companies in the same industry.

        Market sentiment

        There are two key aspects to consider in terms of market sentiment for an IPO.

        The first aspect is to look at the overall trend of the market where the new stock is listed. If it is upward, the market sentiment for that particular stock may be better. Otherwise, it may be worse.

        The second aspect is to look at the performance of recent IPOs. If most of them perform well, it may positively impact the market sentiment. Otherwise, the influence could be negative.

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