The Best IPO Stocks

The best IPO stocks are those that have a strong financial history as a private company spanning a number of years. Not too many IPOs share this characteristic. Hence IPO risks may be substantial.

What is an IPO, you may well ask? An IPO is an Initial Public Offering which is a company that is applying to list on the stockmarket.

Investors are being offered shares at a start-up price.

I mention IPOs, commonly referred to as 'floats' because you may be bombarded by stockbrokers (including online brokers) with advertising in the form of a prospectus. Free IPO advice is provided by some companies on the web.

I generally avoid IPOs. Disadvantages of IPOs may include having no history of earnings capacity as a private company. In this case,they may be too high risk and their value may not be easy to assess.

Buying an IPO needs to be weighed up against what other already listed quality stocks may be available at a fair price on the stock market. As Warren buffett has suggested ...

... THE CHEAPEST STOCK AVAILABLE ON ANY GIVEN DAY IS UNLIKELY TO BE A NEW FLOAT; OTHERWISE WHY WOULD THE VENDORS BE SELLING IT?

Small private companies applying to do an IPO launch on the stock market will have to incur substantial listing costs that may significantly affect performance or initial profits, as listing costs can run into hundreds of thousands of dollars.

The exception to my avoidance rule may be for larger companies that do have a history of financial performance as unlisted companies over a number of years.

However, consideration needs to be given to the different environment in which unlisted companies work.

For example, unlisted companies do not have to provide dividends payouts for a large pool of investors. They can concentrate on longer-term objectives, and are generally more free to operate out of the public gaze.

Reporting requirements for unlisted companies are not as extensive. Hence their performance as a newly listed company may alter considerably as they come under greater public scrutiny.

The best IPO stocks tend to have the characteristic of being very popular, This tends to ensure that the demand for the stock will be strong and hence the stock price will, in all likelihood, exceed the listing price.

For this reason, you may have difficulty in obtaining an allocation of shares, unless you have a habit of taking your stock broker out to lunch!

Of course, this assumes that your stock broker has been given an allocation to distribute.

Assuming your aim is to be an investor rather than a punter, the best IPO stocks are those that you would still like to be holding in five years time.

Some other questions that need to be considered include ...

• where are all the float proceeds going, to the vendors or the company itself?
• does the prospectus forecast significantly improved earnings into the future? If so beware!
• is the company in a 'hot' sector? The heat can quickly dissipate
• have the vendors issued stock to themselves the year before the float? Work this one out for yourself!
• other evidence of the directors feathering their own nest including aggressive accounting policies, related party transactions or large salaries paid to management.

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