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Getting In Early

6 December 2013 in Trading Ideas

With a stock market performance like we’ve seen in 2013, one can certainly understand the inclination of companies to jump at the opportunity of an initial public offering.

And many have done so this year: According to Renaissance Capital, 182 companies completed IPOs in 2013, as of Nov. 4, which makes the post-bubble record high of 217 IPOs in 2004 look extremely vulnerable right now.1

From a dollar perspective, however, 2013 has already delivered. This year’s IPO proceeds of $43.4 billion (again, as of Nov. 4) topped 2012’s full-year amount with two months to go, while trailing only 2007’s $48.7 billion as the highest total since the tech bubble.

Those mass quantities aside, it’s the attention that is showered on many of these IPOs that can often capture the hearts and minds of investors.

How many water-cooler conversations across the world sprang from Twitter’s trip to the public market just weeks ago? (And how many are still going on?)

This special aura that often surrounds newly public stocks inspired us to create our latest motif, Recent IPOs, a portfolio of 25 stocks that went through a public offering within the past two years (but not within the past two weeks).

recent iposThe methodology is actually pretty simple: After compiling the past two years’ worth of IPOs, we screen out stocks with market caps of less than $100 million as well as those with average trading volumes of below $1 million in the most recent two weeks.

After that, we rank the stocks left on a combined factor of their time since IPO and market capitalization. Finally, the top 25 stocks are then essentially equal-weighted to comprise the motif, relying on the thesis that a combination of publicity, new companies, and new industries can find investors bidding up the shares of newly public companies.

And certainly that phenomenon has worked, on average, in the current market. As Renaissance noted last month, the 182 IPOs in 2013 had produced an average return of 32%, while the 66 IPOs that priced in the previous 90 days had gained, on average, 26%.

That’s not quite an apples-to-apples comparison with the S&P’s 26% rise for all of 2013, but this motif may resonate with investors who find single-IPO stockpicking too risky but tend to believe that the attractiveness of IPO stocks to the broader market could be conducive to generating returns across a wider sample size. Still, with newer offerings comes higher volatility that investors need to be willing to accept no matter how risk tolerant they believe they are.

1Renaissance Capital, IPO Center, Nov. 4, 2013, http://www.renaissancecapital.com/ipohome/news/us-ipo-recap:-2013-passes-2012-in-proceeds-raised-16611.html, (accessed Dec. 3, 2013).

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