Tuesday, May 21, 2019

The IPO game

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Loss Leaders

Below are companies with the largest losses at IPO. They are ranked by trailing EBITDA.
A poor guide to future performance (Link)
This chart shows US-listed companies (>$1B) that had IPOs since 2000. They are grouped based on their 1-day price change on offering day ("pop"). Many of the companies with large price increases on the first day had large declines subsequently. It's clear that the direction of first-day moves is irrelevant for determining a stock's future performance.
German chipmaker Infineon Technologies soared 127% on its launch day but it is now trading at about 50% of its IPO price. Shares of Mastercard which actually declined on opening day in 2006 are now up over 6000%.
Advice from Warren Buffet on IPO's (Link)
At the most recent Berkshire annual meeting Buffet went on to explain how he and Munger have not bought shares in an IPO since 1955, when they bought 100 shares of Ford. Buffet believes buying new offerings during hot periods in the market is not something that the average person should think about at all.

Buffett reminds investors that just because a strategy works for one investor doesn't make it a good idea. He says, "There always can be scenarios in which a company goes on to grow in price post-IPO. I mean, there was a pair of dice at the Desert Inn one time many years ago - they had them in a little case - that came up 32 times in a row - 4 billion to 1, maybe a little bit over. So you can go around making dumb bets and win. It's not something you want to take as a lifetime policy, though. I worry much more about the things that I do than the things that I don't do. I missed all kinds of opportunities in my life. You just want to make sure that you're on the side of the house when you bet rather than bet against the house."

Buffett advises investors to think about the reasons they're investing in a company at a certain valuation.