Should I indicate interest in this IPO? Should I accept an allocation of
stock in this company?
Will the price pop on the first day? And if it does jump a lot, should
I immediately "flip" the shares at a profit? How will my broker react to
my "flipping" this IPO? (Most brokers "require" that I hold the shares for
at least 15 days to as long as 60 days from the date the IPO starts
trading. If I "flip" the IPO early, I will be "blacklisted" from receiving
any future IPO allocations from that broker for some time (up to 6 months).
Then I may miss out on a really good IPO.)
Will this IPO price maintain a premium over its IPO pricing,
at least, until the end of the end of the "required" holding period?
If this IPO has iffy prospects, might it be better to try to buy it
in the after-market? The stock might even fall below the IPO pricing
level. Plus, if I wait and buy it in the after-market, I can easily trade
it in and out without worrying about the "required" holding-period and
"flipping" penalty.
Or, maybe, I should entirely avoid this company's stock? It's prospects
are doubtful and the IPO is way overpriced? Maybe the insiders are
unloading their interest in this company at an extreme multiple to its
true long-term value?
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These are complicated questions.
But every IPO trader must think about them before accepting an IPO stock
allocation or he will lose a lot of money in this IPO feeding-frenzied
market.
To help you decide, I've listed some of main factors which I've found
consistently influence the performance of an IPO as it comes "out of the
gate" and for the short period after it begins to trade.
Please review these ideas and then post your opinions and research (citing
sources) on how you think this particular company's IPO stacks up against
the following criteria:
1. Who is the lead underwriter and how do its IPOs perform in the
after-market?
An IPO underwritten by Goldman Sachs, Wm Blair, Merrill Lynch, or
Morgan Stanley Dean Witter is almost always a winner. There are exceptions,
of course. Recently GS's BNBN is trading below the $18 IPO price. However,
if you were allocated every GS IPO during the past year, you would have
a very profitable portfolio.
IPOs from DLJ, Credit Suiss First Boston, H&Q, BTAB, and BancBoston RS
sometimes work, sometimes don't.
On the other hand, an IPO from Volpe or Ing Baring should probably be
avoided, since they almost always collapse in the after-market.
2. Is the company the "First-Mover" in its market niche?
For example, Etoys being the first to go public in its niche and being
well-known to the online community is a great IPO performer.
3. Does the company have "Pricing Power", i.e., does it have a unique
or patentable product? Similarly, does the company have strong branding
awareness?
Good IPO performers like PCLN had a patented product. Another example,
STRM, has strong branding awareness (STRM is known to aspire to be the
AOL of the Spanish-speaking markets).
4. What is the size of the Float and Total Shares Outstanding?
An IPO with a float around 2-4 million shares which represents about
25% to 33% of total shares outstanding will perform better than an IPO with
6-10 million or more shares in the float (e.g., BNBN, while underwritten
by GS, floated 25,000,000 shares and broke its IPO price in the first week
of trading).
5. How fast is Revenue Growing and what is the relationship between
Revenue Growth and Growth of Total Costs?
IPOs, like MRBA, MKTW, MMXI, CMTN which all have strong annual
(year-to-year) sales growth of 100% to 300% AND where Costs are NOT
INCREASING at the same rate as sales (i.e., costs are either decreasing
absolutely or are increasing at a slower pace than the increase in sales)
performed better than IPOs with stagnant sales (e.g., ONES) or where costs
were INCREASING FASTER than sales (e.g. NETO).
6. Who are the company's clients or customers?
This is especially important for BTOB (business-to-business) companies.
IPOs like BWEB or PHCM which have long lists of BTOB users perform well
in the after-market.
7. What is the size, growth rate, and nature of the company's market
niche?
Does the company operate in a rapidly growing or hyped market niche
(e.g., dsl in 1999)? Does the company operate in the internet infrastructure
market place? Lately, the IPOs with staying power have tend to emerge
from the Internet infrastructure sector. Consider the after-market
performances of well-known content providers iVillage Inc., iTurf Inc.
and TheStreet.com Inc. All three stocks tripled in value in their debut
sessions but have since lost most or all of those gains. Now consider the
infrastructure companies: Healtheon Corp., Portal Software Inc., Bottomline
Technologies Inc. and Brocade Communications Systems Inc.; high-speed
Internet-access companies Redback Networks Inc., and Copper Mountain
Networks Inc.; and Latin American portal company StarMedia Network Inc.
Internet-infrastructure companies have been able to sustain their
aftermarket gains because institutional investors view the stocks as
long-term investments.
8. Who are the company's Early Backers (during the venture capital
"Incubation" Phase) and who are the company's the major stock holders?
Again, the example of ETYS, which was funded by idealab!, Highland Capital
Partners, and Sequoia Capital Partners (of Yahoo! Fame) comes to mind.
IPOs with little prior backing may not be good long term investments.
However, this criteria cannot be viewed in a vacuum. All the listed factors
should be considered. For example, NETO is 80% owned by IBM, yet it broke
its IPO pricing from the get go. Possibly, because, it's product is directly
competing with Microsoft's Frontpage and because its Total Costs are
INCREASING at a faster rate than its Revenues.
9. Has the company's management been successful in other ventures?
10. Lastly, How Much "BUZZ" or Hype is There for This IPO?
How active is the SI thread for this IPO? Is the thread for this IPO full
of supportive comments? Are the majority of posters saying it's a HOT deal
which they would love to get into? How is the press treating this IPO?
What is CNBC reporting about this company?
Remember, in the end, the price of a stock goes up or down based on the
DEMAND for that stock. If there is little interest expressed in it on the
boards, there may not be a lot of interest in it after it IPOs.
Again, there are exceptions to every rule. FFIV, had no participation
on the SI thread, yet has doubled from IPO price in a week. RUBO and KOOP
were panned by many SI posters who didn't indicate interest in it and
these two IPOs also nearly doubled in a few days.
It's, therefore, important to look at all the criteria, not just to
focus on one or two. Any IPO which has favorable rankings in 3 or 4 of the
above 10 items and which is neutral on the remaining criteria, is a
good risk, imo. Any IPO which ranks unfavorably on the majority of these
criteria, and just neutral on the others, should be avoided, imo.
Also keep in mind, that the above 10 factors are interrelated. It's highly
unlikely, for example, that an IPO with a strong underwriter or strong sales
or great name recognition would generate very little interest on the SI
threads. Conversely, even an IPO like BNBN which got a lot of air-play on
CNBC and had a strong underwriter (GS) performed poorly, because of its
huge float and because it lacks "First-Mover" quality (BNBN is overshadowed
by AMZN).
You must weigh these factors very carefully.
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Okay, so taking all the above into account, how does this IPO stack up?
Should we buy into this one or pass on it? Please post your ideas.
Hersh Stern
mailto:topannuity@monmouth.com
Source for information about underwriter's performance:
quote.com
Source for information about the management team and their experience:
sec.gov
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