9.17.2014

IPOs are the "shiny objects" of the investment world

How an IPO gets done, step by step
Stick With Benjamin Graham's Advice And Never Touch An IPO

Excerpt:



  1. Very few initial public offerings trade at a discount. Think about Graham's overarching philosophy when it came to investing-Graham was all about finding overlooked, underappreciated, and most importantly, undervalued securities that were trading for much less than what they were worth. When a company is going public, the interest in the security is at an all-time high. The IPOs are the "shiny objects" of the investment world. In Graham's view, the inherent novelty of a newly traded security made it a fertile breeding ground for the kind of irrational euphoria that Graham famously warned about in his Mr. Market analogies.
  2. Newly traded securities will likely fall hard at the first hint of bad news. Once the newness of a freshly issued stock begins to fade, investors will often flee at the first sign of trouble (even if the business itself happens to be excellent). To use Graham-era examples, Coca-Cola (NYSE:KO) lost 50% of its share price within a year of its 1920 public offering because of supply troubles with the sugar refiners. Clorox (NYSE:CLX) lost 35% of its value following its 1928 public offering when it had to slow its expansion due to sodium hypochlorite shortages that preceded the Great Depression. IBM (NYSE:IBM) lost 75% of its value between its 1916 public offering price and its low price in 1932, even though earnings more than sextupled over that time frame (by the way, the terrible economy of the Great Depression does not alone explain IBM's drastic fall. The company had traded at an irrationally high 60-90x earnings throughout the 1910s and 1920s. As soon as CEO Tom Watson said that the company was stockpiling unsold parts at its factories, the stock fell like a stone)
  3. It is very difficult to gauge the appropriate price to pay for an initial public offering. When I determine the appropriate price to pay for an ownership stake in the company, I like to have some historical context to base my decision such as: What were the company's earnings during the last business cycle? How did it hold up during the last crisis? What kind of debt is normative for this company? What's a typical earnings multiple placed on this stock? Essentially, I want details about the company's profit history. With an IPO, you have to make a naked judgment call. Graham was skeptical that a fresh offering provided enough details to make an informed decision about the proper valuation of a security.
Comment: I avoid IPO's. Main reason is # 3 above. Benjamin Graham's The Intelligent Investor

1 comment:

  1. Related: Alibaba becomes world’s largest IPO, but stock dives

    It’s official: Alibaba is the world’s largest IPO.

    The title was pretty much in the bag on Friday, when the Chinese Internet juggernaut raised $21.8 billion in a blockbuster public debut, and was on its way to $25 billion after the New York Stock Exchange said the underwriting banks would sell additional shares. On Monday, the company announced that underwriters had indeed exercised the option to purchase an additional 48 million shares at the $68 IPO price, which sealed the deal: The largest IPO in history belongs to Alibaba, a China-based e-commerce giant that is often described as a combination of eBay and Amazon (but bigger).

    In raising $25 billion, Alibaba’s IPO surpassed the 2010 public offering from the Agricultural Bank of China, which raised $22.1 billion in its debut on the Hong Kong Stock Exchange. The previous top IPO in the U.S. was a $19.7 billion deal by Visa in 2008.

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