Small Investors Still Cheated by the IPO Process

by: Stone Fox Capital

On Thursday, two more stocks IPO'ed at significant gains. Unfortunately small investors were left out of the process until the stocks opened significantly higher. By that time though, these investments aren't attractive anymore and if anything the small investor comes rushing in and loses money. Nothing new in the investment world that continues to be rigged against the average small investor.

Both Zipcar (ZIP) and Arcos Dorados (NYSE:ARCO) rose over 25% on the first day of trading. For example, ZIP shot 56% higher in their stock-market debut, but the stock in essence traded down from the opening. The stock IPO'd at $18, but never traded below $27. Leaving any small investor out of the loop of a $9 gain and the privileged with a nice 50% gain just for being a preferred client. Thats assuming they didn't unload it around the highs of the day above $31.

What amazes me is that companies continue to lose out in the process. With the stock opening up at $30, ZIP in essence lost nearly $120M in extra cash by accepting a price substantially below the real market.

It remains to be seen whether either stock will be a success but its noteworthy that both stocks are down during their 2nd day of trading. Apparently the privileged investors have decided the first day gains were sufficient enough.

This brings me back to my article a few weeks ago regarding the Chinese IPOs and how all the money was made in having the privilege of buying the IPO. Investing in the after market as been a suckers game. Of the four hot IPOS recently, only (NYSE:YOKU) has a positive after market gain. The other three, ChinaCache (NASDAQ:CCIH), E-Commerce China Dangdang (NYSE:DANG), and Qihoo 360 Technology (NYSE:QIHU), all have negative prices from the first day close. Clearly investors need to beware. has a interesting poll today asking whether investors feel cheated by the IPO process. Interesting that a whopping 91% of people said Yes. How can regulators continue to ignore the IPO process that discriminates against the small investor?

Disclosure: I am long CCIH. Bought CCIH after it dropped 50% from its post IPO high. Otherwise, its unwise to buy these big gainers after the big IPO pop.