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As an academic, William Sharpe was one of the most brilliant and prolific financial researchers. MBA students are familiar with his work on portfolio analysis and the capital asset pricing model. Portfolio managers often use the eponymous Sharpe ratio to determine how much excess return they are producing per unit of risk. Dr. Sharpe has received innumerable honors. In 1990 he was even named a co-recipient of the Nobel Prize in Economics.

This man, however, is no ivory-tower academic. His theories are used every day in the world of finance. Dr. Sharpe is also an entrepreneur. In 1998, he founded what is now Financial Engines (NASDAQ:FNGN). The idea was to use the power of the Internet to deliver independent financial advice to investors.

Well, Financial Engines just went public. The company issued 10.6 million shares at $12 per share. That was above the indicated offering range of $9-11 per share. Since the underwriters, Goldman Sachs and UBS, have a 15% over-allotment option, the offering will raise about $146 million before fees. A little less than half the net proceeds is going to selling shareholders.

The stock immediately rallied higher as soon as it became available on the secondary market. At last look, it was trading around $17 per share. That's 42% above the offering price. That gives the company a $675 million market capitalization. FNGN is now selling for 7.9 times sales and more than 100 times trailing earnings. The stock ain't cheap.

Jay Ritter, another respected academician, is best known for his work on IPOs. According to Professor Ritter's work, IPOs tend to underperform the market over a rather long period of time. His research suggests that it would make little sense to buy into an IPO unless you can get it at the offering price and sell it soon after it runs up on the secondary market.

I gave Professor Ritter a call to ask what he thought about the Financial Engines IPO. He said he isn't too concerned about long-run underperformance in this case. He said, "Long-run underperformance is concentrated among companies with less than $50 million in sales in the year before going public." Because Financial Engines generated $85 million in revenues in 2009, it does not fall into that category. As a result, Professor Ritter isn't worried about Financial Engines being a long-run underperformer.

As a former academic myself, I am tempted to buy a few shares just to keep a close eye on the stock. However, I will probably wait until the stock falls back a bit before I get in. Of course, that was my plan with Google when it went public at $85 per share in 2004. I'm still waiting for my buy order to execute on that one.

Source: Financial Engines: A Sharpe IPO