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“Don’t let your guard down when investing in the excitement of initial public offerings (IPO).” — Adrian Mastracci, discretionary portfolio manager & financial advisor at Lycos Asset Management.
Levi Strauss is the current IPO euphoria darling. Investing in IPOs can be very exciting, often creating plenty of buzz and fascination. They can also be risky propositions.
Many IPOs are overpriced or priced to perfection
Many IPO stock prices turn out overpriced, or priced to perfection. IPOs are the first sale of stock by private companies to investors. Most IPO companies usually hire a securities firm to manage the stock offering and exchange listing.
It is very difficult to predict how the IPO stock price behaves after it becomes listed. Hype and excitement can overcome all signs of rational thinking.
IPOs allow initial private investors to cash out
Typically, there is limited historical data to analyze. Most IPOs are companies going through growth periods. Many IPOs are vehicles for the initial private investors to cash out or reduce the size of the holding.
Shares of IPOs can be hard to get in quantity when investor demand is high. They are better suited for speculators who have time to follow daily price gyrations. Having an iron clad sell strategy is critical.
Investors need to be convinced that an IPO’s upside potential is real. Not all IPOs have fared well after the buzz of initial excitement. Expect large price swings in both directions and often.
I don’t buy IPOs for clients. I manage their long haul “serious” money strategies, not speculative appetite.
Your questions are invited.
Editor’s Note: Monday’s Motley Fool Market Foolery podcast has a good summary of the latest batch of IPOs, including Lyft, Uber and Pinterest. Click here to listen.
Adrian Mastracci, Discretionary Portfolio Manager, B.E.E., MBA started in the investment and financial advisory profession in 1972. He is currently a portfolio manager with Vancouver-based Lycos Asset Management Inc. He graduated with the Bachelor of Electrical Engineering from General Motors Institute in 1971, then attended the University of British Columbia, graduating with the MBA in 1972.
