They're Not All Googles
What's a good source for data on IPOs? And how do I go about researching soon-to-be-public companies?
Back in the bubble days, when initial public offerings were all the rage, researching the stock market's latest entrants was as easy as typing IPO.com in your Web browser. Investors were so crazy about IPOs that many companies made it their sole business to cover them. Then, the IPO market crashed; last summer, even the popular IPO.com closed its doors.
The good news: the IPO market seems to be waking up. Some 153 U.S. companies have gone public so far this year, double the 2003 and 2002 numbers, according to IPOcentral.com. And investors still have some excellent online resources to turn to, including IPOcentral.com and CurrentOfferings.com, which launched earlier this year. The latter features news and analysis of current and pending IPOs from industry experts Jeffrey R. Hirschkorn and Tom Taulli, author of the book "Investing in IPOs." IPOcentral.com's best features are its IPO Scorecard, which offers industry statistics each quarter along with the IPOs with best and worst returns, and an IPO Calendar of companies planning to go public. Both Web sites are free of charge.
But investing in IPOs isn't as simple as picking a company out on the calendar and calling your broker with a buy order. In fact, in most cases, few individuals invest in an IPO before it hits the market, and they're usually company employees or family members, says CurrentOfferings.com's Taulli. The big investors in IPOs are the underwriter (the brokerage firm managing the IPO) and other institutional investors such as mutual-fund companies and pension-fund managers. With bigger IPOs, brokers may also invite some of their clients to participate, but such favors are typically reserved for high-net-worth individuals, says Taulli. The benefit of investing in an IPO is that the company's stock is usually offered at a lower price, as an incentive for institutions to commit their capital.
So-called Dutch auction IPOs are more accessible to ordinary investors. Here, potential investors bid on the company's shares before the offering, and when the action commences, shares go to the highest bidders. If a bid is at or above the average of all bids, the investor can buy shares at that average price. With Dutch auctions, "whether you're Bill Gates or a person with just $2,000 to invest, if you bid it right, you get the shares," Taulli says. This is how Google (GOOG) modeled its IPO two months ago, though Dutch auctions are more typical for smaller IPOs, usually raising around $50 million. (A "big" IPO would raise $200 million or more, according to Taulli. Google's IPO raised more than $1 billion.)
For those who don't get access to an IPO, there's always the option to buy the stock after it hits the market. It might not be true IPO investing, but you're still buying into a newly public company with, presumably, a lot of growth potential, says Taulli. It's not necessarily a bad strategy, provided you time your purchase right. Be warned: The share price tends to be inflated in the first few days after an IPO. This year, for example, IPOs on average gained 10% on their first day of trading, according to Thomson Financial. But after six months, the stocks were down to just a smidgeon above IPO price (0.08%). "After six months, the hype goes away," says Taulli. He recommends individual investors wait about six months after an IPO before buying shares, when the company has issued its first or second quarterly report. This way, potential investors can get a more objective idea of the business, and avoid buying at inflated prices.
So who should invest in IPOs? "They're not for the faint of heart," says Taulli. "You've got to be on your toes and expect quite a bit of volatility." As a whole, IPO returns tend to trail the broad stock market over the first few years, according to many economists. However, performance varies greatly by sector, says Richard Peterson, chief marketing strategist at Thomson Financial. For example, he says, a typical technology IPO would do better than a typical biotech, and a typical retail IPO would do better than one in the real estate market.
Lewis Altfest, a fee-only financial planner in New York, views IPOs with skepticism. "Often IPOs are issued at a time when that particular sector of the market is popular and prices tend to be higher," he says. "You can get burned by the hot market."
If you still want to invest in IPOs, your next step is research. The best source of information about a company that's going public is its prospectus, which is submitted to the Securities and Exchange Commission and can be found at its Web site. Don't expect a pleasant read. The SEC requires that companies disclose their operations and potential risks to their potential investors, so the prospectus "is going to read like a document with all the risks attached, not like a marketing document that people are used to seeing," Altfest explains.
If a hundred or more pages of legalese seems intimidating, Taulli recommends focusing on a few selected parts. First is the summary section: Make sure you understand how the company makes money, and that you're comfortable with the industry and its growth potential. Then look at the management. Have top executives run a public company before? Next, review the financials. What are the company's growth rate and revenues? In the litigation section, look for lawsuits that may have been filed against the company. The company's client base is also important. If most of its revenues come from one or a few clients, losing that client could be disastrous, says Taulli.
Sound like too much work? No one said IPOs are for beginners. "There's no excuse for going in blind," Taulli concludes. "If you don't want to take the time, don't do it."
Those willing to pay for IPO research can find in-depth analysis and market commentary at IPOhome.com, owned by Renaissance Capital, a Greenwich, Conn.-based provider of independent IPO research.