Outside the Box: Understanding the Essentials of Evaluating the IPO Market
July 9, 2008
For investors interested in the Initial Public Offering markets, also known as IPOs, there are certain things to keep in mind to garner success. In this article we will delve into what is important to look for when trying to make money in the IPO arena.
One of the attributes to make sure of is that the offering size of the deal should be at least over $90 million. By using this selection parameter the investor separates out the riskiest deals and virtually ensures that there will be enough liquidity in the aftermarket. The offer size is computed by multiplying the number of shares being offered by the proposed price range.
Also, the investor needs to consider profitability. It is best to have at least two years of profitability. In the same vein the offering needs to exhibit clear long-term growth potential. To determine this the investor must establish that the company meets an unmet market need or addresses a widespread business issue. In addition, verify that the company is considered a fast mover and offers superior products in a booming sector.
The investor needs to make sure that company has a large share of insider ownership. They need have at least 35 percent ownership and hopefully much more than that. The reasoning behind this is that if the company has significant percentage of ownership then they have a distinct incentive to increase share prices, which is exactly what the investor desires.
Investors need to make sure revenues exceed $50 million on an annual basis. Stock price studies in the IPO market indicate that revenues are an excellent predictor of stock performance in this market. The studies suggest that the key level is $50 million for the 12 months prior to an IPO. Companies below the $50 million level underperformed the stock market by a margin of 15 percent for the next three years. Companies above it outperformed.
In addition to the key attributes discussed in this article to locate profitable IPOs the investor should also dig into the company’s business and other fundamentals. This puts the odds of success squarely on the investor’s side in this very exciting marketplace called the IPO.
Happy Trading.
Jeff Neal
Senior Writer, Options Strategist & Profit Strategies Radio Show Market Correspondent
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