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The Globe and Mail

A good year for U.S. IPOs – beyond a few notable duds

Initial public offerings, we are often told, are for suckers.

You may recall hearing this last May, in the wake of a rather sizable, yet disastrous, offering by that social-networking company. The rich and connected buy shares at the offering price, then flip the turkeys to unsuspecting investors. Academic studies have found a record of underperformance by U.S. IPOs, and my own review of 2011's U.S. IPO market found it disastrously underwhelming.

I've now finished crunching the numbers on 2012's batch of IPOs and found … well, it just wasn't true this year, Facebook notwithstanding.

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I looked at 167 IPOs on the major U.S. exchanges using data provided by the fine folks at Bloomberg. (Note: I'd love to provide a comprehensive review of Canadian IPO performance. Except that, depending on how you count trusts, REITs and funds, there were only three IPOs on the TSX until a handful in the fourth quarter. This is what you could call a "small sample size.")

To get a better sense of the U.S. IPOs' performance, I tracked their gains and losses versus the Standard & Poor's 500. In effect, this answers the question: Would you have been better off ignoring the newfangled stock and just dumping some cash into an index fund, instead?

And the answer, in many cases, was "absolutely not." More than half – 87 of the 167 – outperformed the S&P 500 from their offering date through Wednesday's trading. More significantly, 62 outperformed by 10 percentage points or more. And 44 outperformed by 25 percentage points or more.

Okay, say the cynics: Most individual investors can't buy at the offering price, and must instead purchase in the scrum on the first day of trading, thereby losing a big chunk of the potential gains. True enough.

So, I also compared the IPOs' returns from their first-day closing price. And yes, the results are muted – but there were still plenty of winners.

While fewer than half – 73, to be exact – outperformed the S&P 500, there were still 43 IPOs that outperformed the index by 10 percentage points or more and 23 that outperformed by 25 points or more. (These numbers are quite similar to the proportions of S&P 500 index members that outperformed their group by the same amounts.)

Now, to be fair, there have been some disasters, so much so that Facebook, underperforming the S&P 500 by nearly 40 points since May, doesn't even make the list of the 10 worst.

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Envivio Inc., a California technology company that processes Internet video, priced its shares at $9 in April and now trades around $1.62 per share, underperforming the S&P by 85 points. Two other California companies – Ceres Inc., an agricultural biotech that went public in February, and Internet merchandiser CafePress Inc., which debuted in March, have underperformed the S&P by more than 70 points. All told, a dozen IPOs are 50 percentage points or more behind the broader market from their first-day closing price to Wednesday.

However: There are eight IPOs that have beaten the broader markets by 50 points or more, and many flew under the radar at the time of their debuts.

Two actually fell on their first day of trading: Vipshop Holdings Ltd., a Chinese online discount retailer, fell from $6.50 to $5.50 on its first day of trading in March. It's now pushing $18 per share, a return 222 points greater than the S&P 500 over the same period.

And Ruckus Wireless Inc., a WiFi provider, fell 18 per cent on its debut on Nov. 15. Since then, it's gained more than 60 per cent, with the S&P 500 up about 5 per cent over the same period.

Conversely, a couple IPOs that "popped" on their first day have continued apace: Intercept Pharmaceuticals Inc., which is developing a liver-disease drug, and Guidewire Software Inc., which sells to the insurance industry, each rose about 30 per cent on their first day of trading. And each has added another 70 per cent in appreciation since.

A year ago, looking back on 2011's underwhelming IPO crop, I noted "these offerings are often overhyped and undersupplied. … They work best, it seems, only when markets are on a continuous rising tide. And when that's the case, who needs an IPO when any old stock will do?"

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This past year, investors who gambled on new issues did as well or better than those who bought any old stock. We'll just have to see what kind of IPO market 2013 brings.

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