It's been two hot years for initial public offerings (IPOs) in general, and for biotech in particular. Though IPOs may help a company, investors shouldn't jump to buy. If a company is a good investment, it will be good long after the IPO. A long-term investor should study the company, review reports to the SEC, share information on the Fool's discussion boards -- and check out our new Biotechnology sector page.
 |
|
|||||||
|
||||||||
|
||||||||
By
But that doesn't necessarily mean good things for individual investors. At The Motley Fool, we advise steering clear of IPOs. Take the time to learn a new public company's business and watch it develop under the light of day. Especially if it's in the biotechnology arena.
IPOs are for the companies' good
Many investors think that if they can just get in on an IPO at the offering price, they will fulfill dreams of fantastic wealth. Like many people, I have friends who've gone to work at various start-ups during this IPO-mania. People they haven't seen recently pop up suddenly, winking and whispering, "Don't forget friends and family" because some companies allot IPO shares to employees' special ones at the offering price.
The vast majority of investors don't have that option. If they want to buy, they must pay the opening day market price, which can be a disaster. The first day price can gyrate like the Boy Who Cried Wolf's lie detector readout. Look at the IPO history for some high-powered non-biotech companies -- Agilent Technologies (NYSE: A), AT&T Wireless (NYSE: AWE), Akamai Technologies (Nasdaq: AKAM), and Palm Computing (Nasdaq: PALM):
A AWE AKAM PALM
IPO date 11/18/99 4/27/00 10/29/00 3/2/00
Offering price $30.00 $29.50 $26.00 $38.00
First day open 45.50 30.13 110.00 145.00
First day close 44.00 31.81 145.19 95.06
Intervening high 162.00 36.00 345.50 165.00
10/13/00 44.38 20.69 49.00 53.19
Change from offering +46% -30% +88% +40%
Change-1st day close +1% -35% -65% -56%
Not one stock of these hot IPOs is priced higher today than its first day open, and only one is ahead of its first-day close -- and that by barely 1%. Things can go bad immediately, too, as early buyers of Palm learned (and you can see). The point is, you won't "miss out" if you wait before you buy.
Keep in mind one thing: IPOs are for the company's good, not yours. They do not occur to give you the chance for wealth. They occur because a company believes that it is the most favorable time to obtain further financing for business purposes. Venture capitalists may be pressuring, or the company may be running out of cash and need more. True, sometimes the company may have steadily pursued an excellent business model and profitability and believe that more capital would allow it to pursue even more profitable opportunities. But the IPO is not intended for the long-term investor's good.
The long-term investor doesn't have to jump at any IPO to have a shot at a good long-term investment. In the history of the stock universe, a good company is going to have many years ahead. You can afford to wait, read the company's quarterly and annual reports, and learn more about the company's business while it operates under new scrutiny.
You won't miss out. For example, this chart shows that investors could have slept through Microsoft's (Nasdaq: MSFT) IPO and bought it anytime during the next, oh, say, 10 years to have an excellent return, despite the recent backtrack in the stock price. Ditto Cisco (Nasdaq: CSCO) or Dell (Nasdaq: DELL) for many years after their IPOs.
In fact, by waiting and learning, you may actually "miss out" on companies that went public because it was a good time for IPOs, not a good time for their business to be publicly owned. Simply, they weren't ready for prime time. By waiting, you may see their flaws exposed and find better places for your money.
Biotech IPOs
A number of biotech companies have had IPOs in the last two years, such as Celera Genomics (Nasdaq: CRA), deCODE genetics (Nasdaq: DCGN), Rosetta Inpharmatics (Nasdaq: RSTA), Aclara Biosciences (Nasdaq: ACLA), Caliper Technologies (Nasdaq: CALP), and Orchid Biosciences (Nasdaq: ORCH). Not one of these companies is profitable, nor is it clear if any will be. They likely chose to go public to maximize the amount of capital they could raise to fund their business development. That doesn't mean it's the best time for you to buy.
By waiting, reading quarterly and annual reports, and sharing with fellow Fools on the company's discussion board, you can watch the company perform while subject to SEC disclosure requirements. You can learn the business and whether management truly deserves your confidence that it can deploy the cash for the most profitable opportunities. And now you even have a new Foolish tool: our shiny new biotechnology sector page, leading you to tons of useful info right at the Fool.
We are truly at the starting line of a very long biotech race. You can afford to take your time.
Yours in Fooldom!
--Tom Jacobs, TMF Tom9 on the discussion boards
Your turn:
Which newer public biotech companies offer the best prospects? Share your opinion on the Biotechnology discussion board!
RSS Headlines
Fool UK
