How should long-term investors approach IPO stocks?

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AD IPO actions are an interesting game for people with allong-term buy and keep an investment thesis? The short answer is – it depends.

In this segment of Backstage Pass, registered on November, 1st, Fool contributors Danny Vena and Toby Bordelon delve into real-world data on investing in the IPO boom.

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Danny Vena: One of the things I really wanted to talk about here, and we talked about it a bit. And sadly, I haven’t talked about this already, and I should have, so I’m going to talk a bit as I lift the sheet here. But there is a lot going on in the IPO and SPAC space.

And so one of the things that I found really interesting here is the fact that we’ve seen an IPO boom. It started last year and there were several times it looked like the IPO boom was going to run out of steam, and it slows down a bit and then starts again. I’m actually going to be sharing my screen here for a minute, and we’re going to look at some stats here.

The average return for IPO investors for the 3rd and 4th quarters of 2020 was near record highs. In the 3rd quarter it was 33.4%, and in the 4th quarter it was 72.8%. Now you might remember that in Q4 we had a number of IPOs that saw triple-digit gains from their very first day on the market. We had actions like C3.ai and Airbnb, and a few more that really took off on their first day.

While yields have remained historically high. They slipped a bit. For the first two quarters of 2021, the average returns for investors who invested in IPOs for the first quarter were 13.5% and for the second quarter were 39.7%. Now one of the things I wanted to highlight here, and this is true of investing in general. But what’s especially true with IPOs is that there are only a few companies that account for the majority of those gains. I thought it was quite interesting.

The way we talk about IPOs and the way you need to be extra careful when investing in a business. Sometimes you don’t want to go straight into it, some people do and they are comfortable with it. But I thought it was really interesting that although it’s really a risky thing to do to place your bets on IPOs. The returns they have given over the past year have been somewhat remarkable.

Toby Bordelon: Then it’s fascinating to me, Danny too, this statistic on just a few companies, the accounts of most of them, it’s the same thing we see in public markets in general. As a lot of your returns are concentrated in a few companies. I guess we’re seeing that happening pretty early on with some of these companies.

Danny Vena: It starts playing out almost immediately and I don’t have the statistic in front of me. I’m going to assess that number, but one of the things they determined where they started the IPO and Trailblazer of the Trailblazer IPO service was the fact that somewhere in the neighborhood of 4% or 5%, I think that was all IPO gains came from just 4% or 5% of companies.

This is a remarkable statistic to me and it really shows how much you really need to focus on the quality of the companies you invest in when choosing IPOs.

Danny Vena has no position in any of the stocks mentioned. Rachel Warren has no position in any of the stocks mentioned. Toby Bordelon owns shares of Airbnb, Inc. The Motley Fool owns and recommends shares of Airbnb, Inc. and C3.ai, Inc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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