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Buy-and-Hold Returns of Almost 9,000 IPOs Issued between 1968 and 2001 10% -

1968 Stock Market

Even in years such as 1971 when the big-winning stocks Southwest Airlines, Intel, and The Limited Stores all went public, a portfolio of all the IPOs issued that year trailed the returns on a comparable small-cap stock index when measured through 2003, and the same happened in 1981 when Home Depot went public.

Even in the banner year 1986, when Microsoft, Oracle, Adobe, EMC, and Sun Microsystems all went public and delivered 30 percent plus annual returns over the next 16 years, a portfolio of all the IPOs from that year just barely managed to keep up with the small-cap stock index.

The performance of the mostly technology IPOs issued in the late 1990s were disastrous. The yearly IPO portfolios in 1999 and 2000 un-derperformed the small-cap stock index by 8 and 12 percent per year, respectively, if measured from the IPO price and 17 and 19 percent per year if measured from the end of the first month of trading.

Even stocks that doubled or more on the opening of trading were very poor long-term investments. Corvis Corporation, which designs products for the management of Internet traffic, went public on July 28, 2000. At the time of the offering, the firm had never sold a dollar's worth of goods and had $72 million in operating losses. Nevertheless, Corvis had a market value of $28.7 billion at the end of the first trading day, a capitalization that would place it in the top 100 most valuable firms in the United States.

It is sobering to contrast Corvis Corporation with Cisco Systems, which went public 10 years earlier. By the time of its IPO in February 1990, Cisco had already been a profitable company, earning healthy profits of $13.9 million on annual sales of $69.7 million. The market value of Cisco's IPO at the end of the first trading day was $287 million, exactly one-hundredth of the market value of Corvis Corporation, which at the time had not yet had either sales or profits. Cisco would be classified as a "growth" company in 1990 with a higher-than-average P-E ratio, but Corvis was a "hypergrowth" company.

Corvis Corporation, with an IPO price of $360 (split adjusted) on July 28, 2000, opened trading at $720 and later rose to $1,147 in early August. Subsequently the stock fell to $3.46 in April 2005.

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