Are IPOs Worth It?

by: Tradevestor

The new issue mania of the 2000s tech bubble and the subsequent crash is still fresh in the memory of most investors. However, a lot of momentum and growth investors still run behind new issues in the hope of doubling or tripling their money overnight. It is very rare for the average investor to get a stock at the IPO price and people try to get in on the first day the stock opens for trading, assuming they are getting in on the ground floor of a great opportunity. But history suggests IPO investors usually under perform the broader market.

This article presents ten 2011 IPOs and their performances against S&P 500 index from their first day of trading till April 4th 2012. Most of the 10 names are technology oriented stocks but there are other stocks as well like Dunkin Brands (DNKN). For diversification, it includes a Russian stock and a Chinese stock. But the results do not change much as shown in the table below.

Ticker Price On 4/4/12 EOD IPO Day Opening Price (Not the IPO price) % Gain/Loss From Opening Price %Versus S&P 500 Since IPO Day
(LNKD) $99.38 5/19/2011 $83.00 19.73 15.42
(Z) $37.67 7/20/2011 $57.01 -33.92 -39.02
(GRPN) $14.54 11/4/2011 $28.00 -48.07 -59.75
(ZNGA) $12.22 12/16/2011 $11.00 11.09 0.11
(YNDX) $26.04 5/24/2011 $35.00 -25.6 -31.2
(P) $10.05 6/15/2011 $20.00 -49.75 -58.81
(NASDAQ:DNKN) $30.21 7/27/2011 $25.00 20.84 15.36
(RENN) $5.35 5/4/2011 $19.50 -72.56 -75.65
(ANGI) $16.86 11/17/2011 $18.00 -6.33 -19.26
(ZIP) $13.50 4/14/2011 $30.00 -55 -62.01
Average -23.957 -31.481
Click to enlarge

Conclusion: While there have been a few rare exceptions like LinkedIn and Dunkin that have returned close to 20% and have held their own against S&P, it is very evident that a vast majority of IPOs lead to disappointing results. Investors will be better of sticking with the tried and true instead of the bold and the new.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.