Did you miss the Oatly (OTLY) IPO back in May? What about the recent Dutch Bros. (BROS) IPO? It’s OK. I did too. And I have zero regrets about not buying these IPO stocks.
That’s not because I think Oatly is a bad company. On the contrary, I personally believe the maker of oat milk products has a tremendous future, as more people turn to plant-based diets. I’ve been eating plant-based since 2013, and I welcome the growing number of products available to people seeking substitutes for traditional animal proteins.
Personally, I’m more motivated to buy Oatly’s products than I am the stock. (Come, you’ve got to admit, this sounds pretty good!)
But I’m in no hurry to buy Oatly shares, now that they’re on the market.
Here’s why: Newly public companies often have what’s called the “IPO pop” when trading begins. IPO stocks can jump much higher from their IPO price, which is sometimes set deliberately low in an effort to attract investors.
For example, Oatly’s IPO was priced at 17. It rallied as high as 22.74 in its first day of trading, closing at 20.20. The stock added to those gains for the next month.
But it’s what happens after that early pop that gets interesting. In most cases, the financial media move on to other stories. Investors would be forgiven for believing that opening-day excitement leads immediately to sunshine, roses, unicorns and oat-milk ice cream for all.
In reality, IPO stocks typically pull back not long after going public (OTLY is currently trading near all-time lows). Some new investors cash out relatively quickly, pocketing profits. Others, such as company insiders and venture capitalists, must wait out the lockup period, usually 90 days but sometimes as long as 180 days. During this time, these early investors, managers and employees cannot sell their shares.
The reason for the lockup is to prevent mass selling, which gives the stock a chance to find its footing as financial institutions add it to their portfolios.
You won’t always see a big run for the door at the 90-day mark.
But that typical pullback in a new stock is not necessarily a sign of failure to come. In fact, some IPO stocks that were deemed “disappointments” in their early days went on to become strong growth leaders.
Investors should be patient with a new stock and wait until it begins an uptrend to make a purchase. If you’re worried about missing out on early gains, that’s not something to be concerned about.
Meta/Facebook (FB) offers clear example of how that works. The stock went public on May 18, 2012 at 38. It rallied to a high of 45 that day, but retraced its gains, closing at 38.20, hardly an auspicious start.
Over the next weeks and months, it continued its retreat, dropping to a low of 17.73 on Sept. 4, 2012. I recall plenty of media reports at the time, bemoaning the failure of the offering.
Early investors did have reason to be impatient. Facebook’s stock meandered through a long consolidation. But the company was very high profile (and still is), and had, at the time, an exciting value proposition.
The stock gradually took flight.
By July 2013, Facebook was in rally mode, and was on its way to becoming a solid growth performer. Over the past five years, it’s returned about 15% annually. Those are pretty healthy returns for early investors, even with the stock suffering the largest one-day value hit ever earlier this week.
For a current example of a much-hyped newly public stock, we can look to Coinbase (COIN).
The cryptocurrency exchange platform went public on April 14 in a direct listing. The company began trading with a reference price of 250, and ended its first day at 328.28, after rising as high as 429.54.
COIN was able to recapture the 300 level in November before the growth selloff and declining crypto prices cut shares down by 50%.
Coinbase’s stock price is very much at the mercy of crypto prices, which, at the moment, are reaching new highs. That alignment with crypto prices is likely to continue as the stock establishes a trading record.
Does the current pullback mean Coinbase stock is doomed to failure? Absolutely not. Every stock is tied to at least one, and often more, underlying economic base cases. As with Facebook, it’s easy to doubt the success of the listing early on, but that could prove to be a mistake.
In any event, when evaluating a purchase of IPO stocks, it’s best to give it time to emerge from an initial pullback, and to begin a true uptrend.
While that often happens, it doesn’t always. Sometimes stocks never regain their early momentum.
For example, Under Armour (UA) went public in April 2016. It rallied to its all-time high of 46.21 two weeks later. Since then, the stock has mostly struggled, although it had two stretches of strong rallies. The first was between November 2017 and June 2018, and the second ran from September 2020 through November of last year.
Those were buyable rallies, so it’s not the case that a stock has to regain its all-time high to present profit opportunities for investors. But the typical post-IPO correction and rebound rally hasn’t yet happened for Under Armour.
With any IPO stocks, such as Oatly or the next highly anticipated IPO, give it some time to establish itself. Stocks typically have about 15 years to notch their biggest gains. That sounds like a very long time, but investors should take heart: You’re definitely not too late if you don’t nab shares of a stock on its first day of trading, or even its first year.
Do you typically try and invest in IPOs?