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Investment Strategies
Categories
- Value Investing
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Growth Investing
|- Income Investing
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Market Capitalization
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Momentum Investing
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Technical Investing
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Buy and Hold Strategy
- Buy What You Know
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Contrarian Investing
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Turnaround Investing
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Tobin’s Q
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Responsible Investing
- ADR's
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Global Investing
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The Dow Theory
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Odd-Lot Theory
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Election Cycle Theory
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Dow Dividend Theory
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Penny Stocks
- Initial Public Offerings
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Dollar Cost Averaging
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Drips
- Risk Tolerance
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Initial Public Offerings
Initial Public
Offerings (“IPOs”) are the first time issuance, by a company, of its common
stock to the public.
Generally, IPOs have
under-performed the stock market averages for the last 30 years. The
troubling statistic to investors is that the majority of IPOs are trading
“under water” two years after they start trading on the stock exchanges.
This seems to be a natural phenomenon for companies that go public. When
going public, companies are thoroughly analyzed by the investment community
and only the best ultimately go to market. By the time an IPO closes, the
company has been heavily marketed, creating a pent-up demand for the stock.
Then, in some cases,
the media takes over, further promoting the “first day bounce” in the stock
price, creating even more demand. Eventually, the stock settles down to its
fair value.
Compounding the
extreme marketing push by the underwriters, normally when a company raises
equity, it has a history of growth and a story to tell, in terms of business
opportunities. Growth is always hard to sustain, and when it falters,
usually within the first two years of having an IPO, the stock price falls
back in line to its fair value, causing the initial purchasers to lose
money.
Getting in IPOs at
the initial offering price, and “flipping” the security quickly when there’s
a run up in price, is a strategy that is often used by investors. The
downside to the flipping strategy is that you may sell a Microsoft-type
investment.
Investing in IPOs is
no different than in any other stock. Your initial purchase price must be
reasonable for there to be a chance to make a profit. I always refer to a
friend of mine who purchased Genentech at its high on its first day of
trading at the IPO date. She wanted to get in on a “ground floor”
opportunity. She then held the stock for almost twenty years. While she
picked a great company, it was a mediocre investment, because she over-paid
on the IPO date. In general, one needs to be very selective and cautious
with IPO’s.
Recently, a
new development has occurred. Private equity firms have been buying
companies with proven cash flows, loading them up with debt, partially
cashing out by declaring dividends, and then monetizing the remaining
investment through an IPO. Since this technique is not time tested,
investors need to be careful if participating in these securities.
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