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The Sweet and Sour of IPOs

By Selena Maranjian - Updated Apr 5, 2017 at 7:58PM

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Investors might want to wait for things to settle down after an initial public offering.

Something interesting happened in late November -- the stock of Goldman Sachs (NYSE:GS) dipped below the price at which it debuted on the open market in 1999, its initial public offering (IPO) price of $53. Don't get all alarmed, though. The stock has since recovered to more than $75, well above its IPO price, but still well below where it was a little more than a year ago, trading in the mid-$200s.

The price dip got me thinking about how we warn people about investing in IPOs. You can read a lot about them in these Motley Fool articles:

What do we warn about? Well, many times a company that's opening up to public investment doesn't have much of a track record. If you bought shares, you'd be doing so in a more speculative fashion than with a company that sported several years of growing revenue and earnings. That's why IPOs of well-known names can be more appealing. But even they offer no guarantee of riches.

Here are some companies that debuted in the past several years:

Company

IPO Date

Opened at

Recent Price

MasterCard (NYSE:MA)

2006

$40.30

$148.10

Visa (NYSE:V)

2008

$59.50

$54.77

UPS (NYSE:UPS)

1999

$64.51

$52.64

Blackstone Group (NYSE:BX)

2007

$36.45

$6.08

CIT Group (NYSE:CIT)

2002

$22.05

$4.66

Chipotle Mexican Grill (NYSE:CMG)

2006

$45.00

$60.93

Data: Yahoo! Finance.

Notice that only two of them have risen above their opening prices, and only one has generated 100%-plus returns for early investors.

Lessons to learn
Getting in early is no surefire path to riches. It's usually best to wait until the dust settles and you have enough information to be very confident in the company's future.

With most IPOs, many privileged people get shares priced well below the opening price, and then quickly sell them, making a speedy profit, but also putting downward pressure on the stock. Also, many insiders hold stock but aren't allowed to sell for several months. Once that time comes, many may sell, further depressing the stock.

So don't be in a hurry to buy into IPOs. You may well get a better price later, even after the company has started to prove itself.

If you're still hankering to add some dynamic, growing stocks to your portfolio, ones that are revolutionizing their industries and making waves, check out our Motley Fool Rule Breakers newsletter -- for free. It regularly recommends companies in exciting industries, such as nanotechnology, biotechnology, and alternative energy.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. United Parcel Service is a Motley Fool Income Investor recommendation. Chipotle Mexican Grill is a Rule Breakers selection, and the Fool owns shares of it. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.

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Stocks Mentioned

Visa Inc. Stock Quote
Visa Inc.
V
$211.08 (-0.30%) $0.65
The Goldman Sachs Group, Inc. Stock Quote
The Goldman Sachs Group, Inc.
GS
$351.68 (1.08%) $3.77
United Parcel Service, Inc. Stock Quote
United Parcel Service, Inc.
UPS
$204.43 (1.02%) $2.06
Mastercard Incorporated Stock Quote
Mastercard Incorporated
MA
$350.58 (-0.79%) $-2.80
Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
CMG
$1,631.09 (-1.64%) $-27.20
The Blackstone Group L.P. Stock Quote
The Blackstone Group L.P.
BX
CIT Group Inc. Stock Quote
CIT Group Inc.
CIT

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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