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The Dollar Stretcher

The Reluctant Investor
Are IPO's for You?

by Matt Stamski
mstamski@gomez.com

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Plying the IPO waters is like fishing for Swordfish in the north Atlantic; feast or a chilly famine. A good catch can lead to a huge upside; just take a gander at EarthWeb's gaudy upshot on Wednesday.

However, despite the clamor for new issues, the plain fact of the matter is that they're highly risky investments. Using data from Renaissance Capital, a supplier of IPO research, we looked at the 225 IPOs issued in 1998 for companies with a market cap greater than $50 million (anything less would be uncivilized).

  • Sixty percent of the IPOs are currently trading at a price below their offer price. Note that the offer price is typically lower than the open price, which most investors would be closer to receiving.

  • The average return for the entire group is 4.19%. Not a bad average. However, if you take away the returns from IPO blockbusters eBay and Inktomi alone, the returns sag to an 11.5% loss.

That's a big swing for two stocks out of 225 and does not bode well for the buy and hold investor (coerced or otherwise).

While the open and the offer may feature, on average, a sixteen percent bounce, getting the offer and unloading the open is still a formidable task for the individual investor.

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