The IPO Price Slide

There's nothing new in asserting that investors should be somewhat skeptical of IPOs (initial public offering), in general, and IPO hype, in particular, but it doesn't hurt to provide the occasional reminder. The Independent reports on three recent examples of companies in the UK whose stock didn't meet expectations after initial issuance. The first is the RHM food group, sellers of Mr. Kipling cakes, whose management promised more than it could produce.

Shares in RHM, which returned to the stock market only in July at 275p a share, fell 8.6 per cent to close at 265p, after news that cake sales [Mr. Kipling] for the six months to the end of October would be 12 per cent lower than last year.

Assuming that if a nation's economy doesn't plunge into a major recession, one would imagine that the cake market would be rather inelastic for a brand name. Apparently not and it's because there has been a drop in the entire cake market, squashing expectations. RHM and Mr. Kipling are well-known brands with proven records yet they still suffered from the curse of 'Past performance is no guarantee of future results.'

Then there's this:

Jessops, the photographic retail chain, which listed in October last year at 155p, saw its shares dive to half their float price a few months later when the company warned that trading since the float had been difficult and it would not meet expectations for the year.

Jessops' dive has been explained to be a result of the emergent public scrutiny of its past performance which accompanies an initial stock offering. The company most likely was buffed up prior to stock issuance and, now, investors see the unbuffed value.

Looking from a distance, Jessops may be relying too much on film cameras and chemical photo developing for its sales base when that segment of its business should be in the rearview mirror. Agreed, the company has plunged into the digital photographic world, but it now is competing in the cut-throat consumer electronics industry which is an entirely different universe.

And the last example:

PartyGaming, the online-poker business that floated in July amid much hype about its growth prospects, also shocked investors with bad news not long after listing. It revealed in September that growth in online poker was slowing, causing its shares to lose one-third of their value.

One stock analyst says that, "PartyGaming stock is more of a bet than an investment." Interestingly, hype is cited as a contributing factor but, more importantly, one element is not cited. Anyone who spends time in the blogosphere knows that the competition for gambling dollars on the Internet is fierce, uncontrolled, and ubiquitous. Just look at the comment spam, the trackback spam, and the email spam.

I think prudent investors should avoid sinking dollars into any gambling business unless they have some convincing knowledge regarding the substance of the concern or they have a system (This doesn't mean, double up when you lose). However, despite everything, sometimes an investor just gets lucky.

In a nutshell, even with convincing foreknowledge, IPOs are risky business. Other cases are as predictable as rolling dice.