Home About Archives RSS Feed

The Independent Investor: What You Need to Know (But Don't) About Buying an IPO

By Bill Schmick
iBerkshires columnist
An initial public offering of a stock, called an IPO, can be either a sucker's game or a chance for instant riches. Determining the outcome requires a great deal of work, knowledge, and luck. Most investors have none of the above when it comes to IPOs.
 
I want to share with you a recent conversation I had with a conservative client (a vegetarian and yoga teacher) on this subject.
 
"I want to buy some stock of this company that makes a vegetarian form of hamburgers. How do I do it?" she asked.
 
"Why do you want to buy it?" I asked, before explaining the mechanics of such a purchase.
 
"Well, it tastes really good, all my friends love them, so I'm sure it's going to be a great stock since more and more people will switch to this healthy choice of food."
 
What's wrong with this picture?
 
No. 1, her analysis is full of holes. Her first mistake is failing to recognize three crucial differences. A good product does not necessarily translate to healthy corporate profits. Many a company with a good product has failed miserably because they did not have the knowledge, experience and financial acumen to make a go of it as a public company in a competitive marketplace.
 
No. 2, it does not necessarily follow that a company with good fundamentals will also perform well in the stock market. There are thousands of cases throughout financial history where companies that IPO never again reach their offering price.
 
And three, if you think it is hard enough to analyze the fundamental valuation and technical position of an already-established public company, imagine the difficulty in trying to do the same for a company with no historical data, and even worse, that sells a new or innovative product that is little understood.
 
Let's look at some of the other mistakes in financial logic my client is making. How many vegetarians are there in the U.S. versus meat eaters? The latest research (2017) put the number at 7.3 million Americans or 3.2 percent of the country's population. That's not a very big market, but she believes that once more people "discover" this non-meat burger, they too will find religion and give up meat.
 
Going public, however, won't change that. This particular company is already distributing its products (non-meat, non-chicken and non-sausage) in dozens of national food chains and stores throughout the nation and overseas.
 
She also needs to recognize that if this plant-based array of products is so good, competitors won't just sit still, they will imitate and offer their own plant-based products. In this case, it is already happening. Burger King is marketing a meatless "Impossible Burger." Reports indicate it is at least as tasty as my client's company's product.
 
Buyers of IPOs should also be aware that these offerings are normally handled by big brokerage houses that know how to promote a new issue and will, for a short time, support its price. Normally, brokers insist that company insiders have a "lock-up" period for a few months before owners and employees can sell their stock. When the lock-up period is over, an avalanche of sell orders hits the market. A look at most IPO stock prices a few months after going public shows a steep drop in price, most often well below the offering price.
 
Some retail investors don't care because they are planning to "flip" the stock. You buy the IPO after it begins to trade (usually at a higher price than the initial offering price), and then sell it for a profit over the next few days. That's where your luck comes in. Your odds of making money are equal to how much hype there is surrounding the stock.
 
Don't be fooled, some IPOs do skyrocket and never look back. You can take your chances, or have some patience, wait a few weeks or months and then, after doing your homework, make your investment. It's not as exciting, but it has been proven to be a better investment style over time.
 
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
0 Comments
     

Support Local News

We show up at hurricanes, budget meetings, high school games, accidents, fires and community events. We show up at celebrations and tragedies and everything in between. We show up so our readers can learn about pivotal events that affect their communities and their lives.

How important is local news to you? You can support independent, unbiased journalism and help iBerkshires grow for as a little as the cost of a cup of coffee a week.

News Headlines
Southwestern Vermont Medical Center Restricts Visitors
SBA Seeks Nominations for Committee On Veterans Business Affairs
Berkshire South’s Gala Raised $90,000
Health Connector Open Enrollment Starts Sunday
Pittsfield Behavioral Health Provider Receives Award
DPU Assessing Future of Natural Gas in Massachusetts
Clarksburg Officials Looking to Resolve Permit Process
Pittsfield Homeless Committee Chairman Defends Efforts
Pittsfield Health Department Eying Rise in COVID-19 Cases
'My Man Godfrey': High-Class Struggle
 
 


Categories:
@theMarket (347)
Independent Investor (450)
Retired Investor (18)
Archives:
October 2020 (7)
October 2019 (1)
September 2020 (6)
August 2020 (6)
July 2020 (10)
June 2020 (7)
May 2020 (9)
April 2020 (9)
March 2020 (5)
February 2020 (7)
January 2020 (10)
December 2019 (7)
November 2019 (8)
Tags:
Debt Debt Ceiling Interest Rates Bailout Fiscal Cliff Euro Banks Europe Deficit Stimulus Stocks Stock Market Rally Metals Japan Federal Reserve Energy Pullback Oil Housing Recession Wall Street Congress Jobs Election Greece Taxes Markets Commodities Europe Crisis Economy Selloff Retirement Currency
Popular Entries:
The Independent Investor: Don't Fight the Fed
@theMarket: QE II Supports the Markets
The Independent Investor: Understanding the Foreclosure Scandal
@theMarket: Markets Are Going Higher
The Independent Investor: Does Cash Mean Currencies?
The Independent Investor: General Motors — Back to the Future
@theMarket: Economy Sputters, Stocks Stutter
The Independent Investor: How Will Wall Street II Play on Main Street?
The Independent Investor: Why Are Interest Rates Rising?
The Independent Investor: Will the Municipal Bond Massacre Continue?
Recent Entries:
The Retired Investor: Food Faces Escalating Prices
@theMarket: Politicians Play Cat & Mouse With Investors
@theMarket: Investors Reduce Risk as Stimulus Talks Fail
The Retired Investor: China Leads Global Economic Recovery
@theMarket: One way or Another, Markets Expect More Stimulus
The Retired Investor: U.S. Moves to Nail Down Strategic Metals
The Retired Investor: Halloween Could Be the Holiday Test Case
@theMarket: Markets Feel the Heat
The Retired Investor: Back to the Future in America's kitchens
@theMarket: Investors Face a Rollercoaster Ride