IPO Investing

As my first post for the Two Investing blog, I thought that I would comment on my recent experiences with Initial Public Offering (IPO) investing. Scott and I first looked into investing in an IPO back in 2004 when Google (GOOG) had a Dutch auction for the allocation of its shares. Neither of us ultimately decided to participate in the IPO because we thought that the ~$90 offering price for Google was too high at the time (Google’s final IPO price was set at $85 on 8/18/2004, and its shares starting trading on 8/19/2004) – we continue to frequently joke about this as well as why we didn’t just buy Apple (AAPL) on the open market that same day (Apple closed at $15.36 on 8/19/2004). This Wall Street Journal blog article provides a great look back at Google’s performance in the nine years since its IPO. Since Scott greatly enjoys spreadsheets, the spreadsheet shown in the article is fun to look at and certainly puts Google’s (and Apple’s) performance into perspective.

After not seriously considering IPO investing much at all since the time Google went public, Twitter’s (TWTR) IPO filing got me interested in finding an opportunity to participate in an IPO this past fall. My online, discount stock brokerage regularly lists IPOs for retail customers (like me and Scott), and when Twitter became available at my brokerage firm, I completed a Conditional Offer to Purchase (COTP) stating how many shares of TWTR I would be willing to buy at the offered price (which was a range). I did some research and due diligence and knew that the TWTR IPO was incredibly popular among institutional investors (which was definitely clear when the offering price for TWTR’s shares was revised upward in advance of the IPO). Combining that with the fact that my brokerage firm allocates IPO shares based on account size (larger first) and a history of past participation in IPOs (neither of which I had), I knew that although I had completed a COTP, I would most likely not be allocated any shares. I still affirmed my COTP the morning of the IPO but was not surprised at all when I was not allocated any shares. Later I read that the TWTR IPO was in fact 30-times oversubscribed.

Even though I did not get any TWTR IPO shares, there were two additional upcoming IPOs (both very popular as well) that I was interested in for which I could complete COTPs, so I tried to get IPO shares for Zulily (ZU) and Vince Holding Corp (VNCE). Again, I was not allocated any shares. All three of these companies jumped in valuation following their IPOs (first day return above the IPO price: TWTR 72.7%, ZU 71.4%, VNCE 43.3%) and have continued to trade with positive returns in the secondary market (aftermarket) since then. With all three of these IPOs, I only had interest in buying shares at the IPO price for each offering. If I was not allocated shares, I would not buy stock at the market price on the open (regardless if the opening price was higher or lower than the offering price). I felt that these stocks were all good choices (especially for some shorter-term returns) and would not mind owning them at the market price, but I wanted the experience of participating in the IPOs which is why I followed this plan.

In the middle of this process, Scott actually told me about a new online stock brokerage firm, LOYAL3, that was offering commission-free investing for a selection of stocks as well as IPO access for retail investors. After signing-up for an account, I received notification that LOYAL3 was offering retail investors access to the IPO of AMC Entertainment Holdings (AMC) on a first-come, first-serve basis. I quickly placed a small reservation (paid for with my credit card – a unique way to buy stock that LOYAL3 offers) for up to $500 of AMC stock at the IPO price if I was allocated shares on the day of the IPO. I then waited for approximately two weeks until AMC was priced at $18 per share (which was at the low end of its $18 to $20 range), and on the morning of its IPO (12/18/2013), I found out that I had received my full allocation of $500 of AMC which was definitely exciting. Although AMC’s first day return of 5% was more modest than the returns of TWTR, ZU, and VNCE, it was still a positive return on my invested capital. AMC has continued to do well in the aftermarket and closed 2013 at $20.56 (up 14.2% from its IPO price). I am still holding my full long position in AMC and look forward to watching its performance ahead.

Although IPO investing certainly carries significant risk with the possibility of immediate negative price performance (see the chart of Chegg (CHGG) as a recent example – IPO price of $12.50 followed by a first day return of -22.6%; CHGG has decreased in price further in the aftermarket), I feel that participating in properly selected IPOs can be a very good strategy. The key, of course, is getting access to shares at the IPO price which is still very hard for retail investors to do (especially those with small accounts such as me). However, I plan to stay active in attempting to obtain IPO share allocations this upcoming year in order to keep learning so that I can best apply these experiences to my overall portfolio strategy.

Full disclosure: long AMC stock; long AAPL call options.

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