Last week left stocks perched on another record high; they're off that high this morning, with the S&P 500 (^GSPC +1.18%) and the narrower, price-weighted Dow Jones Industrial Average (^DJI +0.66%) down 0.16% and 0.21%, respectively, at 10:15 a.m. EDT.
To market we will go!
The stock market's strong performance this year -- the S&P 500 has gained 14.5% through Friday -- has ignited a specific segment of the equity market: initial public offerings, or IPOs, in which companies sell shares to public market investors for the first time. It's a matter of simple economics; as stock prices (and valuations) increase, so, too, does supply. According to figures from Dealogic cited in The Wall Street Journal, 64 U.S. listings have raised $16.8 billion so far this year, substantially above the $13.1 billion raised during the same period last year.
What are individual investors to make of this phenomenon? I'm not a huge fan of Jim Cramer -- I find his hyperkinetic presentation style grating, and, although he preaches a fundamentally oriented investing style, his rapid-fire recommendations -- and reversals -- aren't consistent with that line. With that said, I think he got it mostly right when he made the following comments on IPOs last Friday:
If you nail it, if you get in on the right [IPO], you can have gains of 20%, 30%, even 100% in a day. The immediate nature of these profits makes them incredibly attractive. The potential of big gains can easily get in the way of your better judgment. ... Whatever you do, don't buy the new IPO right after it has started trading. I've got staggering statistics that show you are almost a sure loser if you buy a hot stock in the market right after it IPOs.
If you ever feel like you have to own the newly listed shares of a company, you're almost certainly making a mistake. Just like any other stock, the investment decision with regard to an IPO comes down to a comparison of market price with intrinsic value. When you combine a sky-high valuation with huge uncertainty regarding intrinsic value -- think Facebook, for example -- the potential for losses is high.
Instead of massively hyped technology IPOs, investors are often better off looking at boring businesses with dependable growth prospects. Two of those are in the current IPO pipeline: HD Supply Holdings, an industrial distributor, and Votorantim Cimentos, a Brazilian cement company, which has filed plans to raise $5.4 billion in the U.S.
