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Published: October 16, 2009
It's the classic Cinderella story. Rags to
riches. From nothing to something.
The big dance begins with a single step -- the initial offering
of a company's shares to the public.
Thousands of investors try to "get in on the ground floor."
Take Microsoft (Nasdaq: MSFT). The company went public in
1986 and has gained more than +35,000%. More recently,
Google's (Nasdaq: GOOG) shares hit the market and have since
shot up more than +500%. Such gains are hardly limited to
high-tech issues. Retailer Urban Outfitter (Nasdaq: URBN)
has gained +33,230% since it debuted in 1994.
Some companies share prices immediately skyrocket. Shares of
Chipotle Mexican Grill (NYSE: CMG) doubled in their first
day of trading. The list goes on and on.
In a downturn, however, companies don't want to sell new shares
to a pessimistic market, and most investors are extremely leery
of picking up shares in startups and are even leery of larger
companies that are finally going public.
History shows that such caution is usually misguided.
IPOs outperformed the market by +10.5% during the three years
after the 1987 crash, according to a recent study. The same
thing happened during the tech crash: IPOs beat the market by
+13.1% in 2001 and by +38.9% in 2002.
There's some logic behind this
outperformance: Only the most
resilient companies with promising
outlooks would go public in the
middle of a downturn. Less stable
companies might postpone their
offerings and wait for a more
bullish environment.
A slate of solid names are set to go
public before the end of the year
including Dole Food Co., Hyatt and
Dollar General. Some 38 other public
offerings already have hit U.S.
exchanges this year.
Many of them have performed well:
|
Company
(Ticker) |
Issue Date |
Price on First Day of
Trading |
Return |
|
SolarWinds |
5/19 |
$12.50 |
+83% |
|
Mead Johnson |
2/10 |
$24.00 |
+75% |
|
Bridgepoint |
4/14 |
$10.50 |
+61% |
|
Education Management |
10/1 |
$18.00 |
+26% |
|
Rosetta Stone |
4/15 |
$18.00 |
+26% |
|
Digital Globe |
5/13 |
$19.00 |
+25% |
|
Verisk |
10/6 |
$22.00 |
+23% |
The numbers show IPO activity is picking up: Deals for the
third quarter of this year were worth $6.5 billion compared with
$1.7 billion in the second quarter. Last week saw $10 billion in
deals alone.
The trouble is that it can be difficult for individual investors
to lock in the initial offering price when a company goes
public. Most IPOs are controlled by investment banks and other
institutional investors, leaving individuals to fight over
what's left.
Fortunately, there's a little-known exchange-traded fund that
allows individual investors a piece of the exclusive IPO market.
The fund is called First Trust U.S. IPO Index Fund (NYSE: FPX)
and it invests in initial offerings of 100 of the largest,
best-performing companies going public in a given year.
The fund holds the new stocks for 1,000 trading days and
rebalances its portfolio each quarter. The fund's underlying
index captures about 85% of the market cap created through IPO
activity in the U.S. and holds mostly mid to large-cap stocks.
The success of recent offerings could be just the start of a
major boom. As the economy gets better, investors will see more
offerings come to the market and experience the sort of pop they
have grown accustomed to. This fund offers the best way for
individuals to get in on the ground floor of those offerings
without having to buy the shares individually.
The fund is already up +37% this year -- and could easily
continue to climb this year and throughout the economic
recovery.
--
Brad Briggs
Staff Writer
StreetAuthority |
