What have you done for me? | On Mighty River Power

A colleague of mine shared a funny story recently. He was sitting in his office the day Mighty River Power shares were floated. This colleague had a tempered (neither hot nor cold) view of IPOs, much like our own. He prefers the market to collect the information, and price new issues accordingly. He, like us, will own Mighty River Power, but through a diversified ETF of New Zealand shares.

Anyway, into his office saunters one of the many individuals who bought shares through the float. He said to my colleague, “My shares in Mighty River Power have gone up 9% today. What have you done for me?”

Fair enough reaction. Mighty River Power shares climbed 9.2 percent that day, to $2.73 on the NZX. Now they trade in the mid $2.20s.

Over and over again, we heard that investors should get in on the list to purchase shares. Reasons varied, but consistent themes emerged, including the idea that the Government would need to price it below actual value to encourage investors to buy the next energy company after Mighty River Power.

Advisements hit television screens telling people to “Get ready to share in Mighty River Power” and “Get your share”.

An then you had all the positive news stories. One article on said “MRP was attractive to overseas investors because of its high dividend yield, which was not available in many still recession-affected countries in the developed world. That appeal is heightened by the firm's solid cashflows, low-risk nature and renewable electricity generation base - ticking a lot of boxes all at once” (The Dominion Post, Mighty River Power shares tipped to rise on high demand, 10/5/2013).

Well, how could it lose? Smart guys seemed to like it. With every brokerage firm in the country selling new issues, it was hard to find a contrary opinion.

Even the Labour/Greens electricity buying plan, which seemed designed to try and minimise investor interest and thus reduce revenue to the Government (a seemingly self-inflicted wound), was initially shrugged off.

And so, when shares went up 9% in one day, it was confirmation bias at its best. Any idiot would have known it was a slam dunk.

But there’s a funny thing about security prices: they’re influenced by the news. If the news is better than expected, shares do better than expected. If news is worse than expected, shares follow suit. And the news hasn’t been very good.

Now, most brokers - who recently sold Mighty River Power shares with abandon - are forecasting a price, 12 months from now, below the float price of $2.50.

What happened? Well, there have been a number of stories in the news that have shaken investors’ confidence - the Labour/Greens proposal; talk of soft demand for the major product, power; uncertainty around the future of Tiwai Point aluminium smelter; the fact that this is a drought year and Mighty River Power sources power from dams on the Waikato River. And lastly, the fall of the New Zealand Dollar may be causing overseas investors to sell out. Uncertainty is something investors don’t like.

So the news hasn’t been great - perhaps worse than expected - and prices reflect that. But that’s also a good thing; prices need to drop (meaning there is potentially greater upside) to compensate new investors who take the risk. This is how markets work.

The point is simply this… No matter the hype or the excitement, in the end it’s profits - and news that impacts profits - that move the price. There is no slam dunk and no sure thing.

Mighty River Power is still worth owning, within a prudent diversified portfolio (an investment that rarely goes up 9% in day, nor falls 15% in a month).

So what have we done today?

I guess it’s more about doing the right (boring) thing, day after day.

ENDS

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