Stingy Investor Contact - Subscribe - Login
  Home | Articles | Screens | Links | SNW | Rothery Report
 
Is that a hole in your IPO?

I like to hike a few kilometres, pick up a free newspaper at Staples, and settle into the local Tim Hortons for a coffee. While reading the paper during one of my trips I discovered that Tim Hortons itself was on sale. Indeed, the Canadian donut icon recently sold shares to the public in what is known as an initial public offering or IPO.

On March 24 Tim's stock debuted on the TSX under the ticker symbol THI after Wendy's sold 15% of its stake, mainly to institutional investors, at $27 per share. When the public started trading Tim's shares they quickly shot up to a high of $37.99 on very strong demand. Unfortunately, Tim's stock proceeded to fall 12.9% from the high and ended the day at $33.10. Nonetheless, if you were lucky enough to get in at the IPO price of $27 you'd be sitting on a nice profit of 22.6%.

Most of the $27 shares were sold to institutional investors who in turn quickly sold them to the public and pocketed their gains. As is usual, the bulk of hot IPO stock went to the brokers' best clients and other insiders. Only the dregs were left for main street investors. After all, institutional investors (think hedge funds) generate huge commissions for brokers and when it comes to handing out perks like hot IPO shares these big traders demand a big slice of the pie. The process might not be equitable but it has been this way for a long time.

It also nicely illustrates why most main street investors should avoid IPOs entirely. Regular investors rarely get quality IPO shares before public trading begins. On the other hand, buying at sky-high prices when trading starts can set up long-term investors for a big fall.

Professor Jay Ritter of the University of Florida has collected a vast array of historical data on IPOs. Ritter's research indicates that, much like Tim Hortons, IPOs typically move smartly higher from the IPO price in the first day of public trading. First day gains for U.S. IPOs averaged 18.1% from 1960 to 2005. In Canada, first day IPO gains averaged 6.3% from 1971 to 1999.

While Professor Ritter tracks first day IPO gains, he also follows the new companies for the next five years. Five-year average annual gains for U.S. IPOs, after the first day of trading, came in at 10.7% from 1970 to 2003. At first glance a 10.7% gain might seem great but IPOs trailed far behind similar stocks. Over the same period, stocks of a similar size (by market capitalization) outperformed the IPOs by an average of 4.1 percentage points annually which is a huge difference.

The lesson is fairly clear: in most cases main street investors should avoid IPOs after they start trading. I had foolishly thought that the internet bubble would have dissuaded a generation from chasing hot IPOs but it seems that hope springs eternal. A few outsized gains from the likes of Google and many investors are right back to chasing after the next hot thing. Just remember, history is against you when buying stocks shortly after they have gone public. While you may snag a few outsized winners, the losers are likely to dominate overall returns and lead to underperformace.

On the other hand, stocks can become great bargains a few years after first being listed. Very often IPOs crater when initial lofty expectations are not met. Provided that these broken IPOs have real businesses with decent fundamentals, they can represent great values.

Speaking of fundamentals, how does Tim's stack up? At the close of March 28, Tim's traded at $30.52 per share which would put its price-to-sales ratio at 4, its price-to-earnings ratio at 32, and its price-to-book-value ratio at 7.7. None of which are particularly attractive. At the same time, McDonald's had a price-to-sales ratio of 2.1, a price-to-earnings ratio of 16.8 and a price-to-book-value ratio of 2.9. Based on its lofty ratios, Tim's shareholders are expecting significant growth from the company. Canada's favourite donut shop had better deliver or Tim's shares will likely become as attractive as day-old coffee.

At present prices, I'll be sticking to Tim's fresh brew and I'll avoid its stock. But who knows? A bit of Tim might be a much better bargain a few years from now.

Sources:
Initial Public Offerings: International Insights
Returns on IPOs during the five years after issuing


First published in May 2006.

  MoneySense Articles
 Cdn Top 200 2016
 US Top 500 2016
 Retirement 100: 2015
 Cdn Top 200 2015
 US Top 500 2015
 Retirement 100: 2014
 Cdn Top 200 2014
 US Top 500 2014
 Retirement 100: 2013
 Cdn Top 200 2013
 US Top 500 2013
 Retirement 100: 2012
 Buffett Buys
 FB IPO
 Stocks that pay
 Value in the S&P500
 Cdn Top 200 2012
 US Top 500 2012
 Retirement 100: 2011
 Where to invest $100k
 Where to invest $10k
 Summer Simple Way
 A crystal ball for stocks?
 Cheap & safe
 Risky business
 Cdn Top 200 2011
 US Top 500 2011
 Retirement 100
 Dividend investing
 Value investing
 Momentum investing
 Low P/E P/B
 Dividends
 Dividend growers
 Cdn Top 200 2010
 US Top 500 2010
 Graham's prescription
 Income 100: 2009
 The case for optimism
 Cdn Top 200 2009
 U.S. Top 500 2009
 Wicked investments
 Simply spectacular
 Income 2008
 Small stocks, big profits
 Cdn Top 200 2008
 US Top 500 2008
 Value that sizzles
 So simple it works
 Income 100
 No assembly required
 Investing by the book
 Cdn Top 200 2007
 US Top 500 2007
 Invest like the masters
 A simple way to get rich
 Top Trusts 2006
 Stocks for cannibals
 Car bites dogs
 Cdn Top 200 2006
 US Top 1000 2006
 So easy, so profitable
 Top Trusts 2005
 Dogs of the Dow
 Top 200 2005
 Money for nothing
 Yield of dreams
 Return of the master

MoneySaver Articles
 2 Graham Stocks for 2017
 3 Stingy Stocks for 2016
 5 Graham Stocks for 2016
 3 Stingy Stocks for 2015
 3 Graham Stocks for 2015
 3 Stingy Stocks for 2014
 4 Graham Stocks for 2014
 8 Stingy Stocks for 2013
 6 Graham Stocks for 2013
 9 Stingy Stocks for 2012
 8 Graham Stocks for 2012
 Simple Way 2011
 5 Stingy Stocks for 2011
 7 Graham Stocks for 2011
 Simple Way 2010
 5 Stingy Stocks for 2010
 8 Graham Stocks for 2010
 Simple Way 2009
 Timing Temptation
 19 Stingy Stocks for 2009
 4 Graham Stocks for 2009
 Simple Way 2008
 Active at Passive Prices
 Unbundling ETFs 2008
 5 Stingy Stocks for 2008
 5 Graham Stocks for 2008
 Is your index too active?
 Graham's Simple Way
 Canadian Graham Stocks
 5 Stingy Stocks for 2007
 8 Graham Stocks for 2007
 Top SPPs
 The Simple Way
 A hole in your IPO?
 Monkey Business
 8 Stingy Stocks for 2006
 Graham Stock Gainers
 Blue-Chip Blues
 Are Dividends Safe?
 SPPs for 2005
 Graham's Simplest Way
 Selling Graham Stocks
 RRSP Money Market Funds
 Stingy Stocks for 2005
 High Performance Graham
 Intelligent Indexing
 Unbundling Canadian ETFs
 A history of yield
 A Dynamic Duo
 Canadian Graham Stock
 Dividends at Risk
 Thrifty Value Stocks
 Stocks in Short Supply
 The New Dividend
 Hunting Goodwill
 SPPs for 2003
 RRSP: don't panic
 Desirable Dividends
 Stingy Selections 2003
 10 Graham Picks
 Growth Eh?
 Timing Disaster
 Dangerous Diversification
 The Coffee Can Portfolio
 Down with the dogs
 Stingy Selections
 Frugal Funds
 Graham Revisited
 Just Spend It
 Ticker Temptation
 Stock Mortality
 Focus on Fees
 SPPs for the Long Term
 Seeking Solid Stocks
 Relative Strength
 The VR Approach
 The Irrational Investor
 Value Investing

Globe & Mail Articles
 Indexing advice
 Media-shy stocks
 Curse of size
 Market uncertainty
 Be even lazier
 Scary beats safe
 Small, illiquid, value
 Use the numbers
 What value is good value?
 Sculpt for value
 Value vs CAPE
 Graham Rules
 CAPE vs PeakE
 Top value ratio
 Low Beta
 Value and dividends
 Walter Schloss
 Try unloved AIG
 Why I'm a value investor
 New world of ETFs
 Low P/Es possible
 10 yielders
 Be happier
 Long-Short
 Dividend Downside
 Shiller's P/E
 Copycat investing
 Cashing in on class
 Index roulette
 Theory collides
 Diving too deep
 3 retirement villains
 Scourge of inflation
 Economic omens
 Analyst Expectations
 Value stock scarcity
 It's all in the index
 How to pick good funds
 Low Beta Wins
 Hunt for dividend stocks
 Think garage sale

Advisor's Edge Articles
 Passive Rebundling
 Doing the math

Norm Speaks
Flip Books

Tools:
 Asset Mixer
 Periodic Table
 ETF Fee Calculator



 
About Us | Legal | Contact Us
Disclaimers: Consult with a qualified investment adviser before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, financial advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More...