IPOs: Safeguarding Your Wallet
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As you know, today's column is a look-forward to next weeks IPOs. Unfortunately, that would be hard to do. There are only two planned for next week. And one of the IPOs doesn't even have an EDGAR filing!
So, instead of gabbing about upcoming IPOs, let's cover some IPO strategies.
In 2000, the IPO market has seen the good, the bad and the ugly. Actually, there has been lots of "ugly."
But this is quite normal for the IPO market. After all, IPOs are typically small businesses with new concepts. Some work extremely well, such as Yahoo! and eBay. As for the ugly ones, they usually get delisted and you have a tax write off.
Negative Gross Margins: Stay away from these companies. True, this seems obvious. But in the past few years, investment bankers have been willing to take these companies public.
Litigation: Wall Street abhors uncertainty. Perhaps the most uncertain thing is a company that faces is a lawsuit (or lawsuits). Look at the cigarette companies. These stocks have been miserable because of the cloud of uncertainty.
Underwriters: Stick to the big boys, such as Goldman, Morgan and so on. Admittedly, the big boys can have clunkers, but overall their track records are sound. As for small underwriters, they don't have the distribution or analyst coverage to juice the stocks.
Niche Industry: Successful long-term IPO companies are not in niche businesses. Rather, they are in huge businesses. And they are leaders.
Auditor's Report: This is only but a few paragraphs, but crucial. If you see the phrases "qualified opinion" or "growing concern," the auditor thinks the company is close to bankruptcy. Good idea to not put money in these deals.
Buying on the First Day: Don't do it. On the first day of trading, there is lots of hype (you know, interviews on CNN and CNBC). IPOs tend to fall over time. Unquestionably, patience is a virtue.