Driving Off A Cliff?

Published 1 October 2018

Investors can sometimes be rash and self-contradictory. Our experience researching investor behaviour has shown us that even high net worth investors and institutions can be susceptible to fads and being swept up in product or investment hype.

All investors can get somewhat blinded by brand names or dazzled by the potential of short-term gains while forgetting to focus on the long-term fundamentals of a product or stock. James Bond’s favourite car maker, Aston Martin, could be the latest star name to blind investors.

The company is planning a £5bn IPO in October 2018 and industry commentators expect strong demand for the shares, set at a price range of £17.50 to £22.50 per share. However, investing in the stock could make for a rough ride given the company’s less-than-solid fundamentals.

Aston Martin has declared bankruptcy seven times and only clawed its way back to profitability in 2017 following years of losses. And it still managed to register a drop in car sales last year. Taken together, this information doesn’t make the stock look terribly attractive.

Bond fans and car enthusiasts will undoubtedly be excited by the prospect of owning Aston Martin stock — especially those who aren’t wealthy enough to buy one of the cars themselves. However, buying into the IPO could prove an expensive mistake.

Much of the valuation is being pegged on expectations of future growth based on plans for production of a highest-end model, further expansion into Asia and less focus on the UK. But whether these strategies come to fruition and generate the much-needed change within the company remains to be seen.

If those snapping up shares are left disappointed it would not be the first time investors have got carried away by IPO hype and lived to regret it.

Over the years there have been several potentially tasty flotations which didn’t live up to expectations and left investors with a bad taste in their mouths. Investors buying into Facebook, Groupon and even Google were left disappointed by the performance that followed. Furthermore, 2017 saw many investors plough money into cryptocurrencies like Bitcoin, only to get burnt by losses and significant volatility.

We know, through our research, that investors get twitchy when markets are volatile and stocks fall. This can encourage them to make hasty decisions and take their eye off the long-term game. Even large institutional investors fall into the trap of getting caught up in generating short-term gains instead of focusing on a broader, longer term investment strategy.

Whether Aston Martin makes good on its promise of pulling out all the stops to ensure growth and maintain profitability remains to be seen. But a glance at existing data and consideration of the company’s history makes it a potentially risky undertaking. While Aston Martin may have a licence to thrill, investors might want to look beyond the hype and consider less risky and more mundane ventures.

Since this blog was written, Aston Martin cut the higher end of its price range to £20 per share following mixed feedback from investors, Reuters reports. This still gives a potential market value of up to £4.6bn which remains significantly hefty.
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Inigo Rudio