May 30th, 2007

Life Cycle Investing: Loser IPOs Class of 2006

O.K., so those were the winners in the IPO Class of 2006. But what about the remaining 80% and, specifically, the biggest losers? Are there characteristics about those stocks that would suggest they’re not being suitable for taking a risk, not going to lead to any significant increases or, simple, they should be avoided.

Of course, the performance of any individual stock must be viewed within the context of the total market’s action during the same period (it’s RSI, Relative Strength Indicator). On that basis, several IPO’s clearly stand out as big, recent IPO losers (click on symbol to see chart):

  • Fuwie Films Holdings (FFHL)
  • Divx (DIVX)
  • Aurora Oil & Gas (AOG)
  • House of Taylor Jewelry (HOTJ)
  • Melco PBL Entertainment (MPEL)
  • Isilon Systems (ISLN)
  • Raser Technologies (RZ)
  • Achillion Pharm (ACHN)
  • Altus Pharm (ALTU)
  • Acme Packet (APKT)
  • American Mold Guard (AMGI)
  • Alphatec Holdings (ATEC)
  • Aventine Renewable Energy Holdings (AVR)

Enough, this is too depressing. You get the picture. If you had purchased any of these stocks as part of the IPO and held them as they cratered, you would have endured on average around a 50% decline over 6-9 months. That’s in contrast to a 100% increase experienced by the best performers in the previous post.

How do you make this decision? You can do what I have always done … avoid any stock that hasn’t traded for at least a year. But, of course, you have an significant opportunity cost by not participating in some serious gains. Another approach is to make your decision only a thoroughly study each prospectus. But, of course, you need the time, the expertese and the experience to distinguish between hard cold facts and marketing puffery. There is yet another approach …. a discipline based on experience derived from the study of stock charts.

While gathering the 2006-7 IPO’s into separate watchlists for better monitoring, I attended an IBD Meetup Group where, coincidentally, a presenter reported on a recent IBD training. Interestingly, one of the topics covered at the session was new research being conducted by IBD on developing specific rules for successfully trading IPOs. This was sufficient to encourage me to continue my on study of charts of recent IPO’s. I did a Internet search for the symbols of the IPO’s in the Forbes article mentioned in my last posting and came across IPOMonitor.com. The site has lists of all IPO’s for each year of 2000-2004.

I downloaded the information into separate watchlists for each year’s class of IPO’s. Parenthetically, each year’s watchlist of IPO’s didn’t match exactly the number of stocks in the Forbes list (which they obtained from Bloomberg Financial Markets, FT Interactive Data Thomson Financial and Wilshire Associates and their own sources). Since their going public, several things could have happened to several of those companies, including:

  • acquisition or merger
  • bankruptcy
  • being spun off rather than IPO
  • ADR’s listed of foreign corporations

In any event, I now had a database of stock charts for each year’s class of IPO’s that were still being traded:

IPO Class of Number of IPO’s
2007 168
2006 141
2005 143
2004 243
2003 69
2002 61
2001 51
2000 197

Scrolling through these stocks, performing a visual inspection of their characteristics, comparing the winners and losers, inserting trend lines and overlaying RSI’s with the S&P 500 should leads to several trading rules.

(more to follow)

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