IPOs: When Do You Buy?

IPOs are hot items. They’re exciting and they can be all over the news for days, but when is the right time to buy? We’ve collected the data for the 9 largest IPOs of 2014 and the all-time largest IPOs. Just to remind you, the largest ones are shown in the table below:

Fig 1 All-Time Largest IPOs

Source: www.renaissancecapital.com

We’ll look at a selection of five of the all-time largest IPOs, as a representative sample, Alibaba (BABA), Visa (V), General Motors (GM), United Parcel (UPS), and Blackstone (BX). For 2014, we’ll look at Alibaba (BABA), Lending Club (LC), King Digital (KING), GoPro (GPRO), Virgin America (VA), On Deck (ONDK), GrubHub (GRUB), Coupons (COUP), Zendisk (ZEN), and Truecar (TRUE). This data was available on www.inc.com.

2014 IPOs

First, let’s look at the more recent IPOs, which we might still remember, especially Alibaba and GoPro. The chart below shows the price movement from the opening of the first day of trading for about 6 months. GoPro is the standout, with prices moving from its open of $31 (it was offered at $24 but we couldn’t buy it there) to a high of nearly $95 and is now back under $60. Still, it’s a good profit.

Fig 2 2014 IPOs first 6 months

Data source: CSI, www.inc.com

As a group, the 9 stocks didn’t perform well. The average opening price was $31.479, and 6 months later the average price was $31.138. Without GoPro, results were similar, an average open of $33.898, ending at an average of $33.480. These IPOs were not a good investment if you enter on Day 1.

What about a fast profit? Can you get in on Day 1 and out on Day 2, or out within a few days? The next chart shows the price movement of the same stocks over the first 10 days of trading. GoPro and Zendisk stand out as winners, but the other 7 have mixed results. The best average price was on Day 4, $32.94 (up 4.67%), and Day 10 showed a small gain at $32.32 (up 2.68%), without any costs. There doesn’t seem to be much to gain given the risk.

Fig 3 2014 IPOs first 10 days

Data source: CSI

 When Is The Right Time To Buy?

Using the largest IPOs, we can look at the first five years of prices (except Alibaba), and see that the timing is remarkably similar, as shown in the following chart. The four large IPOs bottom out between one and two years (250 to 500 days as shown on the bottom of the chart), then start noticeable upwards trends. Alibaba is in the same pattern at the moment, but clearly more volatile. It is also a Chinese company, which introduces other uncertainties.

Fig 4 Largest IPOs

Data source: CSI

The obvious conclusion is that IPOs start trading at a premium. They are profitable for the original shareholders, for the underwriters, and for most investors who can buy at the offered price before public trading begins. On average, the retail investor, such as you and me, gains nothing by trading in the early days. The good news is that we also lose very little. Waiting for the company to settle into its new public role before investing, which is at least one year, seems to be the best strategy.


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