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How Should Long-Term Investors Approach IPO Stocks?

By Rachel Warren, Toby Bordelon, and Danny Vena – Dec 7, 2021 at 1:20AM

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It's been a record year for IPOs.

Are IPO stocks are a worthwhile play for individuals with a long-term buy-and-hold investing thesis? The short answer is -- it depends.

In this segment of Backstage Pass, recorded on Nov. 1, Fool contributors Danny Vena and Toby Bordelon dive into some real-world data about investing in the IPO boom. 

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Danny Vena: One of things that I really wanted to talk about here, and we talked a little bit about it. And unfortunately, I didn't bring this up already, and I should have, so I'm going to talk a bit while I'm bringing up the sheet here. But there's a lot going on in the IPO and SPAC space. 

And so one of the things that I found really interesting here is the fact that we have seen quite the boom in IPOs. It began last year and there's been several times where it looked like the IPO boom was going to tail off, and it slows down a little bit and then ramps back up. I'm actually going to share my screen here for a minute, and we're going to look at some statistics here.

The average return for investors in IPOs for the 3rd and 4th quarters of 2020 was near record highs. In the 3rd quarter, it was 33.4%, and in the 4th quarter it was 72.8%. Now you may recall that in the 4th quarter, that was when we had a number of IPOs that had triple-digit gains in their very first day on the market. We had stocks like and Airbnb, and some others that just really took off on their very first day.

While returns have remained historically high. They have slipped a little bit. For the first two quarters of 2021, the average returns for investors who invested in IPOs for the first quarter was 13.5%, and for the second quarter 39.7%. Now one of the things I wanted to point out here, and this is true of investing in general. But particularly true with IPOs, is that there's just a few companies account for the majority of those gains. I thought that was pretty interesting.

The way we talk about IPOs and how you have to really be careful when investing in a company. You don't want to jump in right out of the gate sometimes, some folks do and they're comfortable with that. But I thought it was really interesting that even though it's really a risky thing to do to place your bets on IPOs. The returns that they have given over the last year has been somewhat remarkable.

Toby Bordelon: Then it's fascinating to me, Danny too, that statistic about just a few companies, the accounts for most of them, that's the same thing we're seeing in the public markets in general. Like much of your returns are concentrated in a few companies. I guess we're seeing that that plays out pretty early on with some of these companies.

Danny Vena: It begins playing out almost immediately and I don't have the statistic in front of me. I'm going to ballpark this number, but one of the things that they determined where they started up the IPO and Trailblazer of the IPO Trailblazer service was the fact that somewhere in the neighborhood of like 4% or 5%, I think it was of all of the gains from IPOs came from just 4% or 5% of the companies.

That's a remarkable statistic to me and it really shows how you really need to focus on the quality of the companies that you're investing in when you choose IPOs. 

Danny Vena has no position in any of the stocks mentioned. Rachel Warren has no position in any of the stocks mentioned. Toby Bordelon owns shares of Airbnb, Inc. The Motley Fool owns shares of and recommends Airbnb, Inc. and, Inc. The Motley Fool has a disclosure policy.

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