Historically, some of the best investing ideas have come from new issues on the London stock market. When firms first arrive with a new listing after their initial public offering they are often well-capitalised and in the middle of a brisk expansion phase with fired-up, entrepreneurial management teams keen to make their mark in the public arena.
Letting the dust settle However, in his books, outperforming US-based trader Mark Minervini cautions against participating in initial public offerings. Instead, he prefers to let a new issue settle down on the markets so that initial frenzy of share buying and selling is behind a stock before he thinks about buying. I think that approach makes sense because sometimes the pricing of a new share issue overvalues the underlying business. In such cases, the shares can plunge from day one on the market as the valuation finds a more realistic level, such as we saw recently with Aston Martin Lagonda Global Holdings. In other cases, investor speculation can drive share prices too high, too fast, only for the new stock to crash back down to earth again in short order.
Minervini likes to see the forces of supply and demand for the new shares play out before he buys, so he looks for what he describes as a primary base on the new share-price chart. In other words, a period of consolidation where the share price moves sideways more than anything else. The ‘primary’ part of the description just means it’s the first occurrence of such consolidation on the new chart.
I think that’s a great idea because a primary base gives us plenty of time for the market to digest the fundamentals of the underlying business and to assign a realistic valuation. The speculative element inherent in the price will likely be under control by that point, so it is potentially a good time to dig into researching the investment opportunity. One such opportunity exists today in Codemasters Group Holdings (LSE: CDM), which arrived on the stock market in June. It’s now almost six months later, and I think it’s a good time to tune into the company to see what kind of opportunity the shares offer investors.
Significant growth opportunities The firm is a UK-based video game developer and publisher specialising in what it describes as “high-quality” racing games. City analysts that have started covering the firm expect a surge into profitability for the current year to March 2019 with earnings growth around 13% the year after that. Revenue, meanwhile, is shooting the lights out with the compound annual growth rate running close to 43%. I reckon it takes strong revenue growth to generate sustainable advances in earnings, so I think the prospects for the share price look good.
In today’s interim results report, chief executive Frank Sagnier said he thinks that the quality of the firm’s “AAA rated” games and the loyal and “passionate” fan bases of the company’s long-established franchises are generating “growing and increasingly predictable” revenue streams. He reckons a shift towards digital distribution, the evolution of games as a service model and the development of streaming platforms are proving “significant opportunities” for Codemasters.
I think the firm’s growth proposition looks attractive and I’d invest £1,000 into the firm’s shares right now with a view to holding for the long term.
Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.