With the Standard & Poor’s 500 flattish for 2011, it was essentially a break-even year for U.S. equities – unless you followed the unfortunate course of buying the country’s initial public offerings.
For nearly every winner, using the most generous sense of the term, there was a spectacular loser. Specifically: Of 84 significant IPOs of common stock on the major U.S. exchanges, there were just 32 that finished 2011 in positive territory from their offering price, according to data from Bloomberg. There were 29 that lost a quarter of their initial value.
To a degree, this makes sense: With the U.S. market up strongly in the first four months of the year, companies filled the IPO pipeline and came to market in what they thought would be a supportive environment. Then the second half, with its awful August and rampant volatility, cut young and untested companies off at the knees.
Indeed, the 2011 IPO numbers offered an odd result to those of us clinging to the quaint and perhaps naive notion that companies come to the public market to acquire funds for growth. The best-performing segment of 2011 IPO companies were those that paid a dividend right out of the gate, returning their capital as quickly as they obtained it.
Before we examine that phenomenon further, however, a word or two about Canada. While the market for fund and trust offerings on the TSX remained strong, just over a dozen companies sold their common shares in non-Venture Exchange IPOs, according to the Bloomberg data.
With the TSX/S&P down roughly 11 per cent in the year, and minerals companies taking a particularly hard hit at year end, it may be no surprise that Canada’s IPO track record was also poor in 2011. Eight of the companies were down double digits from the offering price, with five losing at least a third of their value.
It is the U.S. performance that’s a bit more eye-opening, given the diversity of the offerings and the overall market’s flat 2011. Only three of the 10 biggest U.S. IPOs gained from their first-day closing price by year end, with seven losing ground. Pick nearly any sector, and its IPOs were stinkers.
Francis Gaskins, an analyst and proprietor of ipodesktop.com, has done this work for us, using prices from just before Christmas . Internet/technology? Down 1 per cent from the offering price and down 19 per cent from the first day’s close. (The social-media subsector averaged a 12-per-cent decline from IPO price and a 34-per-cent decline from the closing price on the first day of trading.) Energy exploration & production and mining? The seven IPOs averaged a 25-per-cent loss. Health care and biosciences produced 16 IPOs, only two of which are up.
Across all sectors, IPOs of Chinese companies were a horror show, due in part to widespread concern about their governance and accounting practices. There were 15 Chinese IPOs; they averaged a 53-per-cent loss from their offering prices, Mr. Gaskins says.
Why the distinction between offering price and closing price on the first day of trading? Because you, dear reader, are probably not one of the superwealthy or well-connected that actually gets the chance to buy stock in the actual offering, at the stated price. Instead, you have to slog it out with the schlubs in the first hours of its debut, making that day’s closing price a relevant metric.
Here’s an excellent example: workplace social-media leader LinkedIn Corp. was one of the best-performing IPOs of 2011, up nearly 40 per cent from its offering price of $45 (U.S.). However, the stock opened at $80 and closed at more than $122 its first day, meaning the current price of about $63 is a steep decline for anyone who bought the shares on the New York Stock Exchange.
The strongest IPO performers were the aforementioned dividend payers. There were 28 in 2011. (Mr. Gaskins includes limited partnerships, trusts and REITs in his analysis, where I did not.) The group averaged a mere 1-per-cent loss, which was more than made up for by dividends, he says. “The dividend paying sector was 2011’s ‘port in the storm.’ ”
Not all dividend payers fared equally well, however; Mr. Gaskins looked inside the offering documents and has come to the conclusion that energy partnerships that have a strong general partner in the industry did better. (An example: Chesapeake Granite Wash Trust is an offshoot of Chesapeake Energy.) Partnerships with a private-equity firm in control, Mr. Gaskins says, tended to show declines in 2011.
It seems narrow and unsatisfying advice for picking IPOs. But it suggests a larger truth: These offerings are often over-hyped and under-supplied, with company insiders selling out while investors are buying in. 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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