Hot offerings get the cold shoulder

As the year draws to a close, investors are opting for stable cash flows and solid valuations over "hopes and dreams" fund-raising campaigns.

Retail investors have shunned Virgin’s offer, with only a quarter of eligible shareholders taking up their entitlement. The much talked about Nine Entertainment initial public offering has slipped close to 10 per cent in only five days of trade.

As the year draws to a close, unexpected responses to recent events in some stocks suggest investor preference is for stable cash flows and solid valuations over the hopes and dreams a company sells investors in a fund-raising campaign.

With foreign airlines dominating the register, the lack of retail investor interest - even at a 6 per cent discount to the traded price when the offer was announced - speaks volumes of the market's view of Virgin as an investment.

As investors are flush with cash, the under-subscription suggests mum and dad investors aren’t comfortable directing funds to a company engaging in a price war in an industry with forceful headwinds. Domestic airlines don’t offer the most compelling value story when lined up against other sectors

Virgin’s entitlement offer closed on December 9, days after Qantas came out with its shocking downgrade. We can only imagine how the Virgin entitlement would have fared if there was no Qantas profit warning. Evidently the battle for market share in the sky between Virgin and Qantas has voided investor enthusiasm for more Virgin stock, even at a discount.

With noted analysts having longer-term doubts about Nine’s future earnings, the company has come under mild selling pressure. While it hasn’t been a disorderly flee from the company, for investors to be taking losses so early in the piece it is a clear signal the market feels there is currently better value elsewhere.

The difficulties facing the media industry have been well documented and Nine is not immune. No marketing campaign can change the structural issues facing television and the competition amongst free-to-air broadcasters.

Not helping Virgin or Nine is the influence of an overly politically-charged week, which has seen various businesses and sectors come under fire. Consequently investor sentiment towards the market in general is weaker.  Combine this with trepidation over the likely looming tapering by the Federal Reserve and it is rational to see a flight to the relative safety of companies with more cash-flow certainty. 

While niche companies and industries can offer an opportunity for growth and some excitement along the way, companies with quality and a reliable earnings stream will always be favoured by the market, especially when sentiment takes a turn for the worst.

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