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A Guide to IPO Investing
By Financially Fit Staff
Investing in initial public offerings (IPOs) has been and continues to be largely reserved for institutional investors. To clarify, we’re referring to the right to buy shares in a company prior to the shares trading on the open market.
Occasionally, individual investors can get in on the IPO action, maybe to the tune of a hundred shares, if they’re lucky. While 100 shares is probably chump change to institutional investors, it could prove to be a sizable holding for an individual.
However, given the difficulty for individual investors in acquiring pre-IPO shares, we choose to focus this month’s education piece on recent IPOs, or companies that recently had an IPO and whose shares currently trade on the open market. It should be noted that even institutional investors often don’t get all of the shares they want on the offering, and make subsequent purchases in the aftermarket.
Investing in recent IPOs is much like investing in seasoned stocks, with the noted exception of the limited availability of information. If a firm is a recent IPO, a good place to start your research is the prospectus, also know as the S-1 filing. The SEC does a great job of posting S-1 and S-1/A (amendment) filings on its EDGAR site (Example: Salary.com's S-1/A filing).
The prospectus generally provides information related to the offering details, the company’s business, its markets, its products, its strategies, risks associated with the company, and the all important financial information.
So, how do you evaluate a newly-public company? Here are factors that need to be considered:
Do you understand what the company does?
Is its industry in a growth mode?
Does it have a competitive advantage?
How does a company compare to its peers on its most basic financial criteria?
- Price-earnings ratio
- Price/sales
- Debt/equity
- Operating cash flow growth (make sure cash flow is positive)
- Historical sales growth
- Historical earnings growth
The biggest obstacle you will find is lack of data. Even if you buy after the initial public offering has settled in, IPO's are still speculative, with little or no public trading history. So, make sure IPO's are relegated to a very small portion of your portfolio.
As always, we recommend that you perform the needed due diligence prior to acquiring a position. We will leave you with one final tidbit – recent IPOs with positive GAAP earnings tend to be the ones that turn into winners.
This concludes this week's issue of Financially Fit. We encourage you to visit our website to review past issues of Financially Fit:
http://www.brokeradviser.com/newsletter.cfm
Disclaimer & Important Information
Financially Fit is owned and published by Business Financial Publishing, LLC of Washington D.C. Business Financial Publishing is neither a registered investment adviser nor a broker/dealer. Readers are advised that this electronic publication is issued solely for information purposes and should not to be construed as an offer to sell or the solicitation of an offer to buy any security.
The views expressed herein are based upon our analysis of the issuer's public disclosures, and assumes both their accuracy and completeness.
The opinions and statements included herein are based on sources (including the companies discussed and public sources) believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. We have not independently verified the information contained herein. This information is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. We encourage you to consult with independent financial advisors with respect to any investment in the securities mentioned herein. You should review a complete information package on all companies, which should include, but not be limited to, the Company's annual report, quarterly reports, press releases and all regulatory filings. All information contained in Financially Fit should be independently verified with the subject company. The foregoing discussion contains statements which are based on current expectations, estimates and projections, and differences from such expectations, estimates and projections can be expected.
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The information contained in this newsletter is not intended to be a complete discussion of information regarding all of the current and/or intended business activities of the covered companies. Any opinions expressed in Financially Fit are statements of judgment as of the date of publication, are subject to change without further notice, and may not necessarily be reprinted in future publications or elsewhere.
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