This month, investors were taught a sharp lesson about initial public offerings.
While IPOs are a good thing for the market, they’re not always a good thing for investors. Often these offerings are met with insider selling that makes owning the stock dangerous for individual investors. So generally, I recommend staying on the sidelines when an initial offering rolls into town, no matter how hot the stock is.
This is especially true with the Facebook (FB) IPO. The eight-year-old social-networking site produced the worst five-day return among the largest U.S. deals of the past decade. And its turbulent IPO is also attracting attention from the Senate Banking Committee and the House Financial Services Committee, as well as the Securities and Exchange Commission. Not exactly a confidence boost for shareholders.
I’m glad that most of you said you had no plans to buy into the IPO. Nearly 70% of you said that you weren’t planning on touching FB stock when I ran my recent Facebook poll, and I hope that I was able to discourage a few more of you from experiencing the post-IPO pain with my blog posts advising you to sit this one out.
Keep in mind that even as tech IPOs came back to life last year with hot offerings like online coupon site Groupon Inc. (GRPN), professional social network LinkedIn Corp. (LNKD), Internet radio company Pandora (P), Chinese social network RenRen Inc. (RENN) and social game developer Zynga (ZNGA), investors have increasingly scrutinized the details of these filings, and performance has been volatile.
From their first day of trading, Groupon is down nearly 60%, Pandora is down 40%, RenRen is down a whopping 70%, Zynga is down almost 40% and LinkedIn—the sole positive—is only up about 6%.
In fact, I just made LinkedIn my Stock of the Day on Facebook now that the company has had four quarters of earnings announcements under its belt and more stable buying pressure. LNKD was added to my Portfolio Grader database shortly after its most recent earnings announcement a few weeks ago, and it has held constant at a B-rating.
The takeaway here is that while IPOs are great for drumming up investor interest, there is plenty of risk to go around. As for me, I like to stick to companies that have proved their mettle by posting stunning earnings announcements, so I don’t get caught up in the frenzy.