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Athabasca IPO: Avoid the temptation Add to ...

It takes nerves of steel to buy a stock on the day it begins trading on a stock exchange. For one thing, you can feel awfully alone: Analysts haven't yet digested any earnings, which can mean that you're buying the stock simply because it's there.

For another, initial public offerings have a poor track record in rewarding early shareholders, at least during their first few years.

Investors may want to bear these thoughts in mind as Athabasca Oil Sands Corp. begins trading on Thursday. The shares were priced at $18 for their IPO. By mid-afternoon, they had sagged nearly 4 per cent.

Big deal, you may say - especially if you intend to hold the stock for the long term. As a big player in Canada's oil sands, the company can reap the benefits of rising oil prices, an improving global economy and (fingers crossed) interest from potential foreign buyers.

All of which might be true. But the academic evidence is stacked against these early, hopeful investors.

According to a 1991 paper (the abstract, alas) from Jay Ritter, now a professor of finance at the University of Florida, issuing firms between 1974 and 1984 underperformed their peers over the next three years.

The reason, he believes, is because investors tend to be overly optimistic about the earnings potential of young companies and firms take advantage of so-called windows of opportunity - presumably in which investor appetite is strong. Athabasca might fit the bill here. It began trading with the price of oil at an 18-month high of $86 (U.S.) a barrel, up 155 per cent from its low in 2008.

What's more, companies that went public at a time when they were not yet profitable (hello again, Athabasca) performed even worse. That's the conclusion from Jong-Hwan Yi, a professor at California State University at Los Angeles, in a 2001 paper that backed up Mr. Ritter's observations.

"The general findings in this study suggest that investors may have been too optimistic about future prospects of the IPO firms, especially those that had negative earnings," Mr. Yi said in his abstract.

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  • Athabasca Oil Corp
  • Updated May 25 4:00 PM EDT. Delayed by at least 15 minutes.

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