June 1, 2011 | In: Opinion
Dangers of Buying and Holding at IPOs
Buying at IPO is an almost guaranteed way to make money, especially if the company issuing the stock has a sterling reputation (many times you can make money even if the company issuing the stock is losing money!). But holding the stock for a while is a totally different story. Let’s look at some examples of recent IPOs:
GM (General Motors Company): The stock was listed back in November of 2010 (I remember I have recommended against it), it was trading at around the $34 level. It went up to almost $40 in January, only to go to just below $30 in April. The stock is now trading at $31.30. Let’s say you bought it on the first day of trading and held it until now, you would have lost 8% of your investment.
DANG (E Commerce China Dangdang Inc): As dangerous stock, DANG was listed back in December of 2010, and it started trading for around $30. In the next few days after the Initial Public Offering, the stock went up and touched $32.79. The stock experienced a January Effect, and then it was stuck in a bearish trend, where it will probably remain forever. How much is the stock trading today? Around $20. You would have lost 33% of your investment had you bought and held the stock. Not a very smart investment.
Now let’s move to the latest IPO on the market, LNKD (Linkedin Corporation): LNKD started trading (officially) at $45, but it was impossible for anyone to buy at this price. The lucky ones bought at around $80. The stock moved up substantially to over $122 in the same day, but again, the stock went down ever since, and today, just over 10 days of its IPO, the stock is trading at $77.73. If you bought at $80, you’re OK, but if you bought at $122 (thinking that the stock would go up), then you now lost 35% of your investment. Expect this stock to go down to $20 or even less, it is trading at around 2,170 P/E and, in all fairness, linkedin is not an essential website for every human being, and can easily be replaced.
See the problem with IPOs is that there is too much excitement in the first couple of days, but after that, investors become more aware about what the company really is, and those in for quick money start jumping ship. There is a rumor that IPOs are undervalued, but looking at the above, with the exception of LinkedIn (just give it some time, it will go down below $45 in the next couple of months), I think it’s fair to say that IPOs are overvalued.
Now the question is, when you should sell when you buy at IPO? I think at the first chance you have. Buying at IPO is literally a gamble, you don’t know anything about the technicals of the stock, you know little about the company, and you’re following the herd.
If you buy in the first hour of the IPO (which is impossible if you do it through your bank, as your order will probably be delayed till the middle of the day, and cannot be canceled), then you’ll make a lot of money. If you buy the next day, then it’s already too late to make a lot of money, if you buy in a week, then expect to lose a lot money.
So, what’s the next exciting IPO, well Facebook of course, now worth $85 billion!