Initial Public Offerings, or IPOs, generate a lot of excitement, but what exactly are they? And should you invest in them?

Initial Public Offerings, commonly referred to as IPOs, happen when a private company first goes public and offers shares of the company as new stock issues. Companies can raise a lot of money through these offerings, while investors can take advantage of the potentially lucrative new stocks before they skyrocket in price. 

The problem is that after the IPO event, there is often a period we refer to as the post-IPO blues. This is when the excitement of the roadshow and big event has passed, and a stock settles down into real life as a public company. In general, this happens at some point in the first four months of trading, and after the initial surge (which usually occurs on day one). The stock then trends down, often landing well below its IPO price.

This pattern happens repeatedly because it takes several quarters for everyone to understand the ebbs and flows of revenue and earnings, get comfortable with the company’s business model, and cozy up to management’s communication style. There is a relationship to build between a stock and its public investors. And that takes time.

For example, of the IPOs tracked by IPOScoop.com in 2019, 67 had negative returns for the year, 12 returned less than 10% to investors, and 12 had gains of more than 100%. And according to Barron’s research, IPOs can underperform up to 2 ½ years after their initial pricing. 

This isn’t to say you should never invest in IPOs. There have certainly been plenty of winners in the market. But investors must tread carefully when buying IPOs.  

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As with any stocks, the key to successfully investing in IPOs is to look for fundamentally strong companies with the ability, strategy, and good management to continue growing over the long-term.