Investing

What Investors Should Know Before Buying IPO Stocks

Initial public offerings (IPOs) are often surrounded by enthusiasm, and that hype can easily snowball into irrational exuberance. That’s why it’s especially important to temper your expectations when dealing with newly public companies. In this Backstage Pass video, which was recorded on Nov. 29, Motley Fool contributor Danny Vena provides insight regarding recent IPO stocks, and why investors might be better off waiting a few quarters. Fellow Fool contributors Trevor Jennewine and Will Healy also appear in this clip.

Danny Vena: This is something that came up that I saw this morning, and this is from the Financial Times. What the Financial Times had a headline that said: “Half this year’s big IPOs are trading below listing price.” That’s a cautionary tale for folks who are thinking of jumping into IPOs early as a way to get rich quick.

The article went on to say, “Half of the companies that raised more than $1 billion at IPO offerings this year are trading below their listing price.” And in fact, Dealogic goes further and says that, “Of the 43 IPOs that raised $1 billion or more, in London, Hong Kong, India, and New York, 49 percent, or roughly half, are trading below their IPO price.” Now, that’s not surprising to longtime Fools, because The Motley Fool has research that shows that only 3.4% of all IPOs are responsible for all the economic gains of newly minted companies over a 10-year period. So Trevor, any thoughts on that metric?

Trevor Jennewine: I think that speaks to the importance of giving it a couple of quarters before you jump into things. There’s sometimes that fear of missing out that causes people to jump in real early, but you’re not missing out. If you wait a couple of quarters, get some more data to make your decision before buying, that’s completely fine. You have plenty of time. You don’t need to rush right in and buy.

Danny Vena: That sounds a lot like my own personal investing style where I really almost never buy an IPO within the first day or within even days or weeks, I usually wait at least two quarters. Will, thoughts?

Will Healy: Even the ones that really were successful, I remember when [Meta Platform‘s] Facebook IPOed, I think in 2012, it went down, it lost half its value before it finally started surging. Even the ones you think are going to look good, and in fact do look good, may not pan out immediately.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.




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