Investors Column – Should You Buy Into IPOs?


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Money Matters

January 23, 2023 by Scott Crosby

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Investors Column – Should You Buy Into IPOs?

IPOs – Initial Public Offerings – should you jump on the bandwagon?  


What is an IPO?

S491-1.jpgCompanies can be privately owned, or publicly owned.  By far, privately owned companies are the most numerous.  When you open a new restaurant of your own, or a new store, or start your own business, you are starting a privately-owned business.  

But if you start expanding your business – if you open a chain of restaurants or stores, or if you grow your company’s sales on a path that you hope will develop into a billion-dollar business, at some point you will need an amount of money greater than the current profit-level can provide.  At that point, you may want to publicly sell stock in your company.

And so, with the help of sales brokers, lawyers, and banks, you offer an Initial Public Offering of stock – an IPO.

An IPO is a sale of shares of stock.  You, of course, retain enough stock for yourself to maintain your control of your company.  But a fraction of the company is bought and sold on the stock market.

Selling stock in  your IPO

Selling shares of stock is like selling anything else.  You and your brokers market the stock.  You advertise the sale.  You want people to take notice, and you want them to decide that they want to buy some of the stock.

Marketing and advertising a stock is like any marketing and advertising.  You put the best face on it.  You make it look as attractive as possible.  Your advertising includes how fast your company has been growing, how big its profits have been, how much you anticipate it will grow in the next five years, etc.  

You and your brokers do your best to make the IPO as exciting as possible.  

“This company is a gold mine, and you can get in on it, cheap!  Buy the stock now!”

If your sales are somewhat seasonal, the IPO is scheduled for a time of year when the best results can be reported.  The IPO will also be scheduled based on the general economic conditions, the stock market’s current conditions, and investors’ current temperament.  If the economy is in a downturn, or the market is in the doldrums, your IPO may be delayed until the general mood improves and investors become more interested in buying.

You time the IPO to put your company in the best light possible.  The difference can mean many millions of dollars.

 

Should I jump in?

An IPO offers a stock at a specific price.  But for the average person, buying the stock at that price is not possible.

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If the marketing for the new stock is done properly, the stock price will jump on the first day of the IPO.  People who are excited react emotionally, and not with their best investing sense; they pay too much, driving the stock price up.

Typically, that over-price surge will last for several days, and then taper back down.  Watch the price trend; see if the price goes down to the original IPO price – or even lower.  The reality may not match the excitement.  

As a publicly-traded stock, the company will be the subject of more intensive research by analysts.  Keep an eye out for those reports.  

If, after a week or two of watching the price trend, keeping an eye on the P/E ratio (see the September 2021, February 2022, and November 2022 Investors Columns about P/E), reading the analyses about the company, and with consideration of general economic factors, you still think it is a good buy, then make your purchase.

If you are thinking of buying several hundred shares, consider buying 100 at a time; buy the second hundred later that day, or the next day, and so on – if it continues to look so attractive to you.  

 History’s examples

A company’s CEO and Executive Team can make or break a company.  A good Executive Team can make a mediocre product profitable.  An inept Executive Team can make an outstanding product an utter failure.

In August of 2021, L Brands separated into two separate companies, Bed Bath and Beyond and Victoria’s Secrets.  While this was technically not an IPO, the results were very interesting – and educational for an investor.

The executives of Bed Bath and Beyond have proven themselves not to be up to the task of managing their new company.  Their financial results have been terrible, and the BBWI stock values have fallen badly.  What seemed like a viable business is failing.

Arguably, Victoria’s Secrets should have had the lion’s share of problems.  Their primary sales target had always been the Baby Boomers. That generation is now getting to an age where sexy underwear is less of a priority.  What was needed was a total marketing realignment of the store’s products to meet the needs and buying of the Millennials.  

Did the Executive Team realize the problem?  Would they know what kind of change was needed?  And could they make the needed changes before the company went bankrupt? 

The history of Victoria’ Secrets’ stock symbol, VSCO, since August 10th of 2021 tells the story.  Despite the declines due to the recession, the stock price is stable.  Quarterly reports generally provide enough good news to push the price upwards, at least temporarily, in spite of the economy.  

Whether you buy their stock or not, keep an eye on BBWI and VSCO.  Compare and contrast the news and stock prices for the two businesses over time.  Watch their Executive Teams.  The economy is still on a downward trend, but when it starts to return upwards, the stock of one might be a place to put a little money and watch it grow.

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