IPO = It's Probably Overpriced | Stock Market Advice

IPO’s were an especially hot topic of investment chatter in the wake of Facebook’s offering debacle. At the time of its IPO, I warned that, although it is possible for Facebook to achieve the necessary growth in revenues and profits to justify its initial evaluation, that seems unlikely to me. The company would have to do just about everything right for quite a long time. This brings me to IPO’s in general.

My personal view is that IPO’s are often a “rigged game” designed to benefit the investment banks and some of their institutional investor friends. There is substantial academic research showing that the majority of IPO’s do not perform well for several years after the initial price surge following the offering—and Facebook didn’t even make it beyond the first day before fading.

Facebook is just one high-profile example: other highly-recognizable tech sector IPO’s trading below their initial price include Pandora Media (P) and Groupon (GRPN). Pandora’s revenue growth quickly dissipated while Groupon has stumbled dramatically with profit concerns. Our own “back of the envelope” research shows that roughly 56% of the stocks that have gone public since the beginning of 2009 are currently trading below their IPO price, even though the S&P 500 is up more than 45% since January 1, 2009. Rather than buying the stock of an untested company that is trading on the hype surrounding an IPO, we prefer to wait until the company has developed a decent track record and cheap valuations.

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Kiplinger points out that despite the post-election stock market surge, not all stocks have benefited from the uptick: "More than 100 issues in the S&P 500 have fallen in price this year, including dozens that have slumped by more than 10%....Yet these stocks won’t all stay in the dumps forever. Some will mount a comeback in 2017, making it an opportune time to try to identify the best candidates."


Quoting George Putnam, Kiplinger details five value opportunities for the new year.


Learn more about Putnam's investing success with turnaround stocks.