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:

1. Fabrinet (NYSE: FN): Provides outsourced manufacturing of optical components for OEMs. The company completed their IPO on 06/24/10. During the current quarter, institutional investors were net buyers of 17.3M shares, which represents about 79.76% of the company's float of 21.69M shares.

2. Ellington Financial (NYSE: EFC): A specialty finance company that invests in RMBS and derivatives. The company completed their IPO on 10/07/10. During the current quarter, institutional investors were net buyers of 10.0M shares, which represents about 77.52% of the company's float of 12.90M shares.

3. FleetCor Technologies (NYSE: FLT): Leading provider of electronic payment cards to commercial fleets/oil companies. The company completed their IPO on 12/14/10. During the current quarter, institutional investors were net buyers of 20.3M shares, which represents about 77.19% of the company's float of 26.30M shares.

4. iSoftStone Holdings (NYSE: ISS): Leading China-based provider of outsourced IT services and solutions. The company completed their IPO on 12/13/10. During the current quarter, institutional investors were net buyers of 8.8M shares, which represents about 77.06% of the company's float of 11.42M shares.

5. Amyris Biotechnologies (Nasdaq: AMRS): Uses genetically modified yeast to make products for specialty chemical/fuel markets. The company completed their IPO on 09/27/10. During the current quarter, institutional investors were net buyers of 11.3M shares, which represents about 65.55% of the company's float of 17.24M shares.

Bracing for a bust? Here's a list of recent IPOs that have been dumped by big money managers:

1. MediaMind Technologies (Nasdaq: MDMD): Provides digital advertising campaign management solutions to ad agencies. The company completed their IPO on 08/10/10. During the current quarter, institutional investors were net sellers of -1.2M shares, which represents about 12.63% of the company's float of 9.50M shares.

2. NXP Semiconductors (Nasdaq: NXPI): Diversified global semiconductor company and former carve-out of Philips. The company completed their IPO on 08/05/10. During the current quarter, institutional investors were net sellers of -9.8M shares, which represents about 10.84% of the company's float of 90.42M shares.

*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.