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IPO Returns Look Lousy — Again

Regulators are reconsidering “quiet period” rules that prevent companies from acting like pitchmen ahead of initial public offerings of stock, but that can also restrict the release of new information that would warn investors away from shares.

Recent performance, meanwhile, offers a not-so-quiet reminder of why investors should approach IPOs cautiously.

Among 70 deals in the first half of 2012 tracked by Hoover’s, a data firm, the average is up 14.7% from its offering price. At a glance, that seems like rip-roaring growth compared with Standard & Poor’s 500-stock index, which is up 11.3% year-to-date.

But those numbers include hot IPOs whose shares were issued to a privileged few before opening for trading well above their offering price. A better measure of how the public has fared in these deals is how share prices have done since opening for trading.

The average of the 70 IPOs opened 12.6% above its offering price, and has since gained little more than 2%. Investors would have done much better by holding a simple, low-fee mutual fund that tracks the broad stock market.

Two quarters of deals don’t make for a pattern, of course. For that, look at the Bloomberg Initial Public Offering Index, which tracks how stocks do during the year following their debut. It has lost more than 20% over the past five years, versus a 5% decline for the S&P 500.

Better yet, look at long-term studies. Among 9,000 stocks that went public between 1968 and 2001, the average one underperformed the small-company stock market by more than two percentage points a year through 2003, according to a study by Wharton professor Jeremy Siegel. Other studies have documented a decline in operating performance following IPOs.

This makes sense. No investor would sell an asset today if he expected it to become sharply more valuable tomorrow. IPOs represent highly informed investors deciding the time is right to sell part of their stakes. When ordinary investors buy shares of a new offering, they’re betting they know better than the insiders. History suggests they don’t, on average.

A tweak to the quiet-period rules may give ordinary investors more information to go on. But what investors really need is a self-imposed hands-off period, to leave new issues alone for a year or two while the initial buzz dies down.


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