Amateur investors have a propensity for going gaga over IPOs, willing to bank their nest eggs on the hope of acquiring the next Google. The success stories are legendary -- a single share of Coca-Cola purchased in 1919 for $40 would now be worth upwards of $5 million.
And initial investors in Wal-Mart would have seen their shares grow a thousand-fold in value. But these sweet payoffs are few and far between -- in reality, you're far more likely to wind up with a lemon.
So is it ever worth the risk to invest in an IPO?
If you had asked Benjamin Graham, the godfather of value investing, the answer would be a resounding no. Why? When a company takes its shares public, it's doing so for a reason: to raise capital, or perhaps they're just cashing out to cut their losses. For one reason or another, you're probably overpaying for your stake. Odds are, you'll have the chance to buy the stock a whole lot cheaper if you're willing to wait a couple of years.
It can be tough to tell which IPOs make sound investments -- which is why we looked to see what the smart money was doing. Since institutional investors have the time and resources to do their homework, it may behoove you to pay attention to their trades.
So what do big money managers think of the recent IPOs? To help you get ideas, we collected data on hedge fund flows and identified the recent IPOs that have seen significant in- and outflows over the last quarter.
Use these lists as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)
Booming potential? Here's a list of recent IPOs that have been snapped up by big money managers:
2. Ellington Financial
3. FleetCor Technologies
4. iSoftStone Holdings
5. Amyris Biotechnologies
Bracing for a bust? Here's a list of recent IPOs that have been dumped by big money managers:
1. MediaMind Technologies
2. NXP Semiconductors
*Data collected on Thursday afternoon, May 12, 2010. The holdings mentioned above may have changed since then. Investing in IPOs is an extremely risky strategy. The volatility of these investments can be extreme -- so only analyze these companies if you believe you have an above-average tolerance for risk and investment losses. Institutional data sourced from Fidelity.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.
Kapitall's Eben Esterhuizen does not own shares of any companies mentioned.
Motley Fool newsletter services have recommended Coca-Cola, Wal-Mart Stores, NXP Semiconductors NV, and Google. The Motley Fool owns shares of Google, Coca-Cola, Amyris, and Wal-Mart Stores. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. 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.