I Will Not Touch That Hot IPO in 2012

In general, I try not to let my emotions get the best of my portfolio, but on two occasions in 2011 I let my excitement over freshly minted IPOs guide my investment decisions. Here's what went wrong and how I plan to avoid making the same mistakes in the future.

Zip on down to the tea shop
I made my first hasty pick back in July when I opened a small position in the car-sharing service Zipcar (Nasdaq: ZIP  ) . I believe that car sharing provides a viable alternative to car ownership for people like city dwellers and college students who only need a vehicle for the occasional errand or short road trips. At the moment, Zipcar is the undisputed leader with more than 650,000 members and 9,500 vehicles spread across 15 major metropolitan areas and 250 college campuses.

The company does face competition from Hertz's Hertz On Demand service and Enterprise, but I believe Zipcar's first-mover advantage and strong brand name should help keep the newcomers at bay.

My second pick was Teavana (NYSE: TEA  ) . If you're not familiar with the company, it specializes in selling loose tea and tea accessories. It currently has 196 stores with plans to expand to 500 stores by 2015.  Although I'm often skeptical of rapid expansion, Teavana seems to have found a comfortable pace. Since February 2009, the company has more than doubled its store count while at the same time maintaining positive same-store sales growth.

Here's how these investments have performed so far. Thankfully, I only opened small positions in both companies, so my pride took a bigger hit than my portfolio.

Company

Cost Basis

Recent Price

Return

Zipcar $24.27 $13.72 (43.5%)
Teavana $28.83 $17.01 (41.0%)

Perhaps I should have let these steep a little longer
I believe I made two crucial mistakes. First, although I didn't buy on the day of the IPO, I still bought too soon. In both cases I picked up shares before the end of the post-IPO lockup period expired and well before the new offering buzz had died down. Basically, I momentarily lost sight of the fact that if Zipcar and Teavana prove to be great stocks, I'll have plenty of opportunities to jump on board. When my goal is to pick stocks I can hold for decades, it doesn't hurt to let potential buys sit on my watchlist while I test out my investment theses.

My second mistake was thankfully limited to Teavana. I'm ashamed to admit it, but I momentarily reverted back to my early investing days and bought the stock on a whim. Maybe I had downed too much maté that day, or maybe it was because I had reread Peter Lynch's One Up On Wall Street the week before and was enamored of the idea of finding a retail stock poised for greatness, but I substituted my love of the store and its products for due diligence. I didn't get around to reading the S-1 until a week after my purchase. When I did get around to doing proper research, I found a lot I liked about the company, but perhaps not enough to buy just yet.

Can I have a do-over?
That being said, I don't intend to sell either company anytime soon. I will also keep my outperform CAPScalls open for now. However, if I could go back, I'd change my strategy and have waited until after Oct. 11, the date the lock-up period ended, to pick up Zipcar. Instead of buying Teavana, I probably would have picked up more shares in one of my other 2011 purchases like Yum! Brands, which offers investors a dividend of 2.4% as well as exposure to China and other international growth opportunities with the familiarity of U.S. governance.

Foolish takeaway
If there's one lesson to learn from my misadventures in IPO investing last year it's that you can afford to wait -- and will likely be better off if you do. While you're waiting for that hot IPO to cool, you can look for investment opportunities among up and coming companies well beyond the IPO excitement like the one highlighted in this special report "Discover the Next Rule-Breaking Multibagger." The report is free, so click here to download it today.

The Motley Fool owns shares of Zipcar, Hertz Global Holdings, and Yum! Brands. Motley Fool newsletter services have recommended buying shares of Yum! Brands and Zipcar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Fool contributor Patrick Martin owns shares of Teavana, Yum! Brands, and Zipcar. You can follow him on twitter @TMFpcmart03. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On January 10, 2012, at 4:15 PM, dbtuner wrote:

    ZIP also faces competition from Avis On Location which now has 10,000 cars available at corporate sites. They will have 30,000 cars by June and can easily move to the urban and college student model.

    ZIP technology is also dated in that you need an RFID card to access the car. All you need with Avis is a smartphone. IDSY technology powers Avis. Short ZIP, long IDSY as a pair trade

  • Report this Comment On January 11, 2012, at 12:14 PM, Mega wrote:

    These two mistakes are just the tip of the iceberg compared to other obvious problems in your current approach.

    How about the fact that you are investing in unprofitable companies, without any calculation how much the shares are worth or what the downside risks are?

  • Report this Comment On January 11, 2012, at 12:16 PM, Mega wrote:

    Or how about the fact that despite identifying "crucial problems" you are too stubborn to sell?

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