The stock market is healthy, and a lot of private companies want to cash in and join the party. The list of upcoming stocks is deep, with as many as 13 initial public offerings scheduled for this week, according to IPO research site Renaissance Capital. But I wouldn’t recommend investing in a single one of them.
That’s not to say that some of the upcoming stocks won’t turn into huge winners. Some of them—particularly the fast-growing home meal-delivery company Blue Apron (APRN)—look like solid investment prospects. But like last week’s much-hyped NBA Draft crop of promising 19-year-olds aspiring to be the next LeBron James or Steph Curry, that’s all IPOs really are—prospects. Just because a company is a popular and well-liked doesn’t mean it will make a great investment. Ask early investors in Twitter (TWTR) and FitBit (FIT).
I’m not alone in my anti-IPO stance here at Cabot. Here’s what Paul Goodwin, who as chief analyst of our Cabot Global Stocks Explorer (formerly Cabot Emerging Markets Investor) advisory, knows a thing or two about high-risk, high-reward stocks, wrote about IPOs three years ago in this space:
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“Making money playing IPOs is easy. All you have to do is get your broker to let you buy a modest amount at the initial offering price, wait until the stock doubles (or triples!) later that day, then sell and book your enormous profit.
“In case you didn’t get it, the use of the term ‘easy’ in the previous paragraph was ironic. There’s nothing easy about achieving perfect execution of this kind. The big money is made by traders who know exactly what they’re doing and do it all correctly.
“And those who make the big money generally do so at the expense of ordinary investors who take a chance on a high-risk bet … and lose.”
Investing in IPOs is total guess work. Even some of today’s best growth stocks took time to get going after coming public. Facebook (FB) is probably the prime example; it famously started dropping after its first day of trading and didn’t stop falling until it was trading at about half its IPO price ($36) three months later. It took nearly 15 months for FB to finally get back to its IPO price. If you bought in early and only held FB stock for about a year, you lost money (see five-year chart below).
Now, if you had taken a wait-and-see approach with FB (as you should with all IPOs), and bought the stock in the summer of 2013 after it had finally broken above its IPO price, you’d be sitting on a return of about 300% today.
So, while the full menu of upcoming stocks may look appetizing, you’re better off sticking with stocks that have already proven themselves. Two or three months from now, with an earnings report under its belt and a chart with some actual history (and hopefully momentum), APRN could be a great investment. But right now, it remains an unknown—just like the other stocks that will come public in the next few days.
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