Last week, I applied for shares in AJ Bell PLC at the Initial Public Offering (IPO). Normally I am averse to IPO’s. Empirical evidence has shown that IPO’s tend to underperform . Insiders who have more knowledge of the firm usually sell out at the top and this is why IPOs in many instances tend to underperform.
But with AJ Bell, I did not have the usual concerns that come with an IPO issue. This is because the founder Andy Bell decided to keep his stock. Furthermore the IPO was only available to customers of AJ Bell that had an account as of 18 October 2018. And only 26.6% of the company shares would be in free float. This limited IPO was a good opportunity to front run and make some money.
For those unaware of front running it is the buying or selling a stock based on anticipated upcoming trades that are large enough to significantly move the price of the stock as a result of the added buying or selling pressure.
Before I go any further, it should be made clear that Front Running with insider information is illegal. On the other hand, if you use information already available to the public to front run, it is acceptable. The later is what I used to ‘game’ an index fund – index front running (LINK :
Index front running is essentially buying a stock just before it is added to an index fund. When the stock gets added to the index fund, the index providers need to go out and buy the stock, as an index fund is just a mirror of lots of different companies. With index funds dominating stock market ownership, this huge buying will cause the stock price to rise and the front runner to profit.
I have used this tactic before to index front run the WPCT . The result of that is I made a handsome profit and now essentially I own WPCT shares fro free. Any appreciation in price of WPCT that has happened since is just a bonus. I am simply playing with house money.
The case for front running the AJ Bell stock was the limited IPO. I knew that outside investors would also want a piece of AJ Bell. The company – being a platform business – has fantastic underlying economics. It generates high levels of returns on capitals, high levels of free cash flow and has low need for capital expenditure meaning a lot of value flows to shareholders.
Furthermore, due to the size of the IPO, the AJ Bell stock would have the required market capitalisation to fo into the FTSE 250. This means index funds would be forced to buy AJ Bell stock regardless of the high price of valuations. This is one of the reasons I don’t like index funds as they simply buy stocks regardless of valuation. It seems to be a pure momentum strategy.
I thus applied to buy shares at the IPO. The IPO price was £1.60 a share. The IPO was oversubscribed and thus I never received my full allotment of shares I subscribed for. I only got 1,245 shares for £1,992.
Friday 7 January 2018 – the day the shares IPOd – played out exactly as I had hoped. AJ Bell shares shot up 37.5% from my purchase price. The oversubscribed shares meant investors had run up the share price to £2.20
The first day AJB stock traded on the London market, as opposed to just the AJ Bell platform, was today. This caused the stock price to surge some more as investors outside the platform wanted shares in the company.
I took advantage of this surge and sold 800 shares for £1.36 each. Whilst AJ Bell is a wonderful business, I overbought shares at the IPO due the front running strategy.
On the shares sold, I have made a handsome profit of £608 (800 shares * 0.76 profit per share).
I still hold 445 shares in the company which are in profit as well.
What this strategy has aimed to do is make the cost of my remaining shares almost free of charge.
The cost price of the remaining shares is £712 (445 * £1.60). Subtracting the profit I made on the share sale, the cost price is effectively is £104 (£712 – 608). It feels like I got these 445 shares for free yet they are now worth over £1,000. I am essentially playing with house money at this point. It is an amazing feeling.
These 445 shares will now form part of my long term buy and hold strategy. I have no doubt that AJ Bell will do well over the long term. The valuation may seem rich at the moment but due to the seemingly free shares I have, I am willing to be patient and let the company grow into its valuation. Additionally, the company aims to pay a dividend to shareholders which further adds to my annual dividend income. I am slowly creeping to that £3,000 annual dividend mark. And my ‘free’ AJ Bell shares will certainly help propel me to that goal.