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IPOs: Good investment or not?

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Cynthia Fick

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Posted: Tuesday, May 1, 2012 2:04 pm

The company that makes your favorite product is about to offer stock shares to the public for the first time. This privately held company is now ready to go public with an Initial Public Offering (IPO). IPOs are an important cog in the economy. They nurture sound business ideas, generate employment, help market competition, and can generate wealth for investors. But not every IPO realizes this goal. You’re really excited, but should you invest?

What you should know

• An infusion of capital and a surge of growth alone won’t ensure any company’s success.

• There’s not a lot of public record information to draw from, so you won’t have operational history to help you decide.

• The prospectus provides information, but its purpose is to market the offer to the public.

• At least one study of average IPO performance showed returns of 67 percent less than the S&P 500 Index in the first five years.

What you should do

• Examine the prospectus for solid indicators of the viability of the business, its timing to market, the state of its industry, competitors, and competitive advantage.

• Look closely at what the prospectus tells you about the company’s management team and board of directors. Is there a record of integrity as well as experience among members?

• Find out which underwriters, if any, are involved in the offer. This does not guarantee a good investment, but their association may speak to the quality of the offer.

• Decide your entry (and exit) strategy with a trusted financial advisor and stick to your plan.

My best advice: IPOs are best avoided by individual investors, unless using a small amount of “play money” from your portfolio. Be clear-headed before you proceed. Look for a reasonably priced offering with a sound business model and signs of potential success.

Cynthia K. Fick is founder of Financial Life Planners LLC in Ahwatukee. Reach her at (480) 346-4073 or ckfick@cox.net.

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