Dear Investor Juan,
My dad and I were able to buy 3,000 Cebu Pacific shares at 125 pesos per share. One of my friends suggested that we sell our shares on the first day of trading (October 26, tomorrow) and just decide on a target price. I just want to ask what you think about this: should I sell on opening day, or should I hold on to the shares for the long term? Thanks sir!
Karl
Dear Karl,
First of all, congratulations to you and your dad for being able to get hold of those much-demanded Cebu Pacific shares. Tomorrow's the first day of trading, so you should be eagerly anticipating what will happen, and how this will affect your decision whether to sell or not?
Extraordinary listing day returns have been well-documented in markets around the world. In the Philippines, University of the Philippines professor Roy C. Ybañez (one of my former finance professors in the MBA program) studied the listing day returns of 43 IPOs from 1989 to 1993. Prof. Ybañez found that these stocks exhibited an average excess return of 40% on listing day, on top of the benchmark return posted by the market index. I'm not aware of any more recent, follow-up study regarding listing day returns for IPOs in the Philippines, but I'm pretty sure that a majority of IPOs since 1993 have reflected comparable excess returns on listing day.
Based on the tremendous demand for Cebu Pacific shares, even way before the subscription period ended, I think it's safe to say that the stock price will rise significantly on the first day of trading tomorrow. But since I don't know enough about the actual level of demand for the stock or the intrinsic worth of the business, I really can't specify the extent to which this will happen. But for the sake of discussion, let's suppose that right in the middle of trading (9:30am to 12:10pm), the stock price rises to 150 pesos. That's a 20% increase in the stock price, which means your 375,000 peso investment will then be worth 450,000, for an easy profit of 75,000 pesos (gross of taxes and fees) if you sell the stock at that exact moment. Not bad for a few days "work", if we count the days between listing day and the day you bought your shares.
So why would you not sell the stock if it reaches 150 pesos per share? Well, maybe you're thinking that if you just wait a couple more minutes, the stock price might reach 160. How about 200 the next day? Heck, it may even reach 300 pesos at the end of the week. Since these are all very real possibilities, any hesitation to sell would not be misplaced. Still, given that the stock price has already risen by 20%, the longer you delay selling and realizing that gain, the higher the chance that you'll lose it, or even part of your investment. So basically your choice is between a sure return of 20% (or 75,000 for your 375,000) on the one hand, and the possibility of a higher return or a loss on the other. The problem with the second option is that it is fraught with uncertainties, like how high or low the stock price will go (return/payoffs), the chance that it will go up or down to a particular level (probabilities), and the exact moment when this price would be reached (timing). Because of this, a lot of people would choose the sure payoff over the gamble, even if the upside potential of the latter is very high, or even theoretically unlimited.
So, what have we learned here? First, that it won't be unreasonable to expect the stock price of Cebu Pacific to significantly increase tomorrow, given how past IPOs have behaved on listing day and the high demand for the Cebu Pacific stock. Second, we've seen how it makes sense to "cash in" on a sure thing, rather than delay the sale and face a lot of uncertainties. If you think both these things make sense, then your friend is right, it would be best if you just sell the stock tomorrow the moment you reach your target price. And that is something you would have to determine for yourself. Is 20% high enough for you, or will you be willing to wait for 30%? Or maybe 10% will do? Whatever that number is, you would do well to relay your sell instructions to your broker early tomorrow morning: you might miss the boat altogether if you just scramble to call your broker at the exact moment your target price is reached.
This is really exciting. I think a lot of us will just spend all of tomorrow morning sitting in front of our computers to watch how things will unfold in real time. Good luck, Karl! We're all rooting for you. :)