By Matt Krantz: Regular individual investors are taking the biggest hit from the
crashing values of companies that have recently sold shares to the
public - while the privileged investors are largely spared.
There have been 41 initial public offerings over the past 12 months, including Internet stock Twitter, restaurant chain Noodles and natural foods store Sprouts Farmers Market,
where privileged investors who bought shares at the so-called offering
price are sitting on big gains, even while most individual investors are
suffering massive losses.
An IPO’s offering price is the price initial investors, usually wealthy clients of brokerages and large institutions and investors, pay for shares of IPOs the day before the trading starts.
Twitter is perhaps the most high-profile example. Investors that got in at the IPO price back in November, $26, are sitting on a 23% gain. Those that jumped in and paid the first-day closing price of $44.90, though, are down nearly 29%.
And it’s not just a few bum deals, but a broad trend in the IPO
market. Investors who got in at the offering price of the 242 initial
public offerings sold over the past 12 months are still up 12.3%, on
average, from their offering price, based on a USA TODAY analysis of
data from IPOScoop.com.
It’s an entirely different story for the masses though, who typically buy IPOs after they start trading.
Investors who bought the same 242 IPOs at the price those deals closed at on their first day of trading are down 3.1% on average.
The odds seems stacked against the common investors, too. More than half of the IPOs to start trading over the past 12 months, 127, are trading for less than the closing price on their first day. However, nearly two-thirds of these deals are still trading at or above their offering prices paid by the well-heeled. Periodically individual investors may get a chance to buy shares at the offering price, but the allocation is usually scarce for deals that are attractively priced.
Another example is natural foods seller Sprouts Farmers Markets, which sold shares to initial investors on Aug. 1, 2013 at $18 a share. The lucky investors are up 46%, while the commoners who paid the first-day closing price are down 34.5%. And then there’s Noodles, a fast casual restaurant with 394 locations. The company sold its IPO shares to privileged investors on June 28, 2013 at $18 a share. Those investors are up 75.2% from that initial price. However, investors that jumped in and paid the first-day closing price of $36.75 are down 14.2%.
The IPO market has become a hostile place for investors as of late, serving up a brutal reminder that shares of newly public companies are not for inexperienced investors. The Renaissance IPO exchange-traded fund, which contains shares of recently public companies, has been cratering since early April. Now this IPO ETF is lagging the broad market.
Investors are simply being reminded of the perils of playing pile-on
with IPOs. Academic research has long found regular investors that are
late to the IPO party tend to suffer sub-par returns. Jay Ritter at the
University of Florida found that the returns from IPOs bought at the
first-day closing price lagged not only the market adjusted for the size of the companies but also mature companies.
And that, too, is a reminder if investors are going to play with IPOs, they’re often best off waiting before jumping in. Ritter found investors are often best waiting at least six months after a new stock starts trading before investing in it. By that time, the shares have a chance to fall.
Investors determined to play IPOs might also consider spreading their bets and buying into mutual funds or ETFs like Rensaissance’s that are able to buy the shares at the offering prices.
Below is a list of the 10 recent IPOs where investors who bought at the offering price enjoyed whopping gains, while investors who bought at the first day lost out:
Source: IPOScoop.com, S&P Capital IQ, USA TODAY research
Source
There have been 41 initial public offerings over the past 12 months, including Internet stock Twitter, restaurant chain Noodles and natural foods store Sprouts Farmers Market,
where privileged investors who bought shares at the so-called offering
price are sitting on big gains, even while most individual investors are
suffering massive losses.An IPO’s offering price is the price initial investors, usually wealthy clients of brokerages and large institutions and investors, pay for shares of IPOs the day before the trading starts.
Twitter is perhaps the most high-profile example. Investors that got in at the IPO price back in November, $26, are sitting on a 23% gain. Those that jumped in and paid the first-day closing price of $44.90, though, are down nearly 29%.
It’s an entirely different story for the masses though, who typically buy IPOs after they start trading.
Investors who bought the same 242 IPOs at the price those deals closed at on their first day of trading are down 3.1% on average.
The odds seems stacked against the common investors, too. More than half of the IPOs to start trading over the past 12 months, 127, are trading for less than the closing price on their first day. However, nearly two-thirds of these deals are still trading at or above their offering prices paid by the well-heeled. Periodically individual investors may get a chance to buy shares at the offering price, but the allocation is usually scarce for deals that are attractively priced.
Another example is natural foods seller Sprouts Farmers Markets, which sold shares to initial investors on Aug. 1, 2013 at $18 a share. The lucky investors are up 46%, while the commoners who paid the first-day closing price are down 34.5%. And then there’s Noodles, a fast casual restaurant with 394 locations. The company sold its IPO shares to privileged investors on June 28, 2013 at $18 a share. Those investors are up 75.2% from that initial price. However, investors that jumped in and paid the first-day closing price of $36.75 are down 14.2%.
The IPO market has become a hostile place for investors as of late, serving up a brutal reminder that shares of newly public companies are not for inexperienced investors. The Renaissance IPO exchange-traded fund, which contains shares of recently public companies, has been cratering since early April. Now this IPO ETF is lagging the broad market.
Chart source: MSN Money
And that, too, is a reminder if investors are going to play with IPOs, they’re often best off waiting before jumping in. Ritter found investors are often best waiting at least six months after a new stock starts trading before investing in it. By that time, the shares have a chance to fall.
Investors determined to play IPOs might also consider spreading their bets and buying into mutual funds or ETFs like Rensaissance’s that are able to buy the shares at the offering prices.
Below is a list of the 10 recent IPOs where investors who bought at the offering price enjoyed whopping gains, while investors who bought at the first day lost out:
| Stock | Symbol | % Ch. from offer price | % Ch. from first-day close |
| Noodles | NDLS | 75.2% | -14.2% |
| Autohome | ATHM | 70.6% | -3.6% |
| Ultragenyx Pharmaceutical | RARE | 66.3% | -17.3% |
| Qunar Cayman Islands | QUNR | 63.5% | -13.6% |
| Xencor | XNCR | 51.3% | -0.2% |
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