When a company with big potential comes to the market for an initial public offering (IPO), we all hear about it. It's a hyped-up, typed-up glam ride. But all that hype serves to do one thing -- drive the price up for people who are already in at the lowest price. Just take a look at how seven recent IPOs have had a nice first day on the market:




Closing Price on
First Day of Trading


Wireless Ronin Tech





NACG Holdings





Aercap Holdings (NYSE:AER)





Spirit Aerosystems





Willdan Group





First Solar (NASDAQ:FSLR)










Source: Nasdaq.com

But studies have shown that most IPOs will go on to underperform over the long run. For example, some of the biggest standouts in IPO history have been AkamaiTechnologies, Avanex (NASDAQ:AVNX), Sycamore Networks (NASDAQ:SCMR), Priceline.com (NASDAQ:PCLN), and Baidu.com (NASDAQ:BIDU). All of these popped more than 300% on their first day, providing the underwriters and insiders who were allocated IPO shares with big wins. But since their IPO dates, all five of these "winners" have had substantially negative returns.

That just goes to show you how much the insiders and underwriters can line their pockets at your expense by hyping up an IPO and flipping it on individual investors.

Don't get caught
If you're interested in these stocks with big potential, here are two things you can do to avoid getting caught by the glamour trap:

  1. Buy only companies that have proven track records of being disruptive innovators in their industries. Finding the ones with an existing competitive advantage will be your best bet for making sure your investment has big returns.
  2. Buy high, but sell higher. If a stock is down from the point you bought it at but you believe the potential is unchanged, hold on to it. In fact, buy more. Many stocks with this type of innovative potential are often volatile because the market is short-term thinking and risk averse. If you keep buying on pullbacks, once that potential comes through you'll be far ahead of the game.

The Foolish bottom line
These are just two of the rules that Fool co-founder David Gardner follows as he advises the Motley Fool Rule Breakers growth investing service. For example, David spotted Intuitive Surgical early on as it worked to revolutionize medicine. Intuitive Surgical makes da Vinci surgical robots, and the company receives revenue from these and the associated instruments. Since recommending the stock last year at a measly $44 and change, David has watched as it returned more than 125% to his subscribers. In fact, he even recommended it two more times because he believed in it that much. Thanks to Intuitive and a number of other picks, David and his team are beating the market by 7 percentage points to date.

Although Baidu and Akamai are down since their IPOs, David and his team caught both of these stocks more recently and at lower prices. Recommending Baidu after it came back to earth has resulted in a 28% gain, and Akamai has done even better -- becoming nearly a four-bagger since it was recommended in April 2005.

If you're interested in more high-on-potential stocks that have disruptive technologies and could be big winners, take a free 30-day trial to the Rule Breakers service today. You'll get access to all of the recommendations from David and his team, as well as the research behind each one. It's completely free, and there's no obligation to subscribe.

Fool Sector Head Shruti Basavaraj owns shares of Intuitive Surgical. Priceline is a Motley Fool Stock Advisor pick. Akamai, Intuitive Surgical, and Baidu.com are Motley Fool Rule Breakers picks. The Motley Fool's disclosure policy is a definite, not a potential.