Investors in IPOs have often sought the sort of market-trouncing returns that characterized a brief and heady period during the late 1990s. But today's IPOs just don't seem to compare. In particular, two recent restaurant offerings gave IPO investors a bit of portfolio indigestion.
Initially, the Ruth's Chris
In other recent restaurant news, KonaGrill
That's not to say all hot IPOs immediately turn south. Last October, TexasRoadhouse's
Fourteen months ago, McCormick & Schmick's
The bottom line here? The purchase price matters. Before paying higher prices just after an IPO, realize that many stocks' prices subsequently drop. In addition, surveys have shown that IPOs generally underperform the market on a longer-term basis. According to a paper from Tim Loughran and Jay Ritter, IPOs from the 1970-1990 period have yielded returns of only 5% annually for the five-year period following their initial offerings.
Investors should acknowledge a fundamental truth -- when an investment bank prices an IPO, they usually have enough information to determine the company's fair value. IPO-happy investors may not always take this into account when they drive share prices upward. The next time you see the price of a hot IPO soaring, make sure it's got the valuation to match.