When a company goes public, it's a blank slate with no reports on its record -- reports that could attest to a stock's potential (or lack thereof) for growth and survival in a cutthroat public market.
In this segment from Industry Focus, Motley Fool analysts Dylan Lewis and Michael Douglass explain why it's a good rule of thumb to wait until at least six months after an IPO to buy into any new company, and what management's commentary can tell investors about the company's health.
A full transcript follows the video.
This video was recorded on July 14, 2017.
Michael Douglass: One of my key steps whenever I'm evaluating a company is to hear how management talks about it, because they are closer to the business than anyone else, and they will help paint a picture that the numbers themselves can't do. You can always say, "Revenue is this, and earnings are going like this." But management can really give you the color of "There were some puts and takes here; here's what happened in this past quarter and here's why we don't expect that to happen next quarter; here were some one-time tax charges; here's exactly what they were; here's why we think they were one-time." And if you don't have that kind of background and that kind of depth of knowledge and expertise, you're operating at a real disadvantage in terms of being able to really understand whether one company is better than another.
Dylan Lewis: And five months out from an IPO, you're only looking at one quarter of reports and one commentary.
Douglass: Yeah, maybe two, if you're lucky.
Lewis: Maybe. But odds are, you're not really getting too many interactions with management. And I also want to see that management says, "No, this is the long-term plan that we're sticking to." If that's a vision that you bought into as an investor, you want to make sure that's what they're going to do, that they're not going to course-correct just because they're hitting some short-term headwinds and decide that they're going to do something radically different with the business, because that's not what you bought into.
Douglass: Right. The measure of a management team is, I think, more what they do when they hit a snag than what they do when things are doing well. In the same way that the true measurement of an investor is what they do when their entire portfolio is down 15%, not when they've been sitting on multiyear gains like, let's say, in an eight-year bull market, for example.
Lewis: [laughs] For example, hypothetically.
Douglass: [laughs] Right, totally academic conversation here. But that's what really tells you whether this is a management you can trust, and whether it's a good management, is how they handle those snags, and those hurdles. You don't necessarily see that immediately. It takes time.