IPO Performance Movie Re-run
May 30th, 2006 by BWV
Last week’s IPO of Vonage (symbol VG) has quickly become the biggest clunker in recent memory. But it has a precedent.. while the PALM offering in spring 2000 was priced in the hundreds of dollars per share — versus Vonage’s $17 — early price action in both newcomers display similar patterns.
But before charts, I must mention 2 things:
1. I advise reading this concise analysis of Vonage’s prospects by Andy Swan of daytradeteam.com– located just down I-64 in Louisville, KY. I totally agree with his “first mover is first loser” theme, and always appreciate this kind of fundamental analysis from 30,000 feet (ie. no ratios and no attempts at forensic accounting).
- I say that with apologies to valuable mentors from my early trading life:
- reporter Herb Greenberg,
- professor & hedge fund manager John Griffin
- the ever-controversial Manuel Asensio
- Regardless, I have a different methodology now.
2. Buying an IPO at the investment bank’s price with the intention to flip on Day 1 is a totally different trade than buying because you think it’s a long term winner. The first usually has good odds. The latter may be good too, but a longer shot and takes far more time to pay off (or be exposed as a dud).
Last Wednesday morning when it began trading, Vonage IPO buyers had about 15 minutes to sell above the $17 offering price. It was all downhill from there as this intraday chart shows.. but any individual investor still had time to exit their “flip” shares with minimal losses. Failed trades happen all the time. That’s OK.
As this multi-year chart of PALM shows.. sometimes they never come back.
Of course some IPO’s become successful. Even then, it’s usually a good idea to sell at least some of your shares on the first day of trading. Under Armour (UARM) priced in the teen’s, traded at $30 on it’s first day, and pulled all the way back to $20 before showing its true intentions.
Moral of all that: If one is a true believer in Vonage’s prospects, then I guess you shouldn’t worry about a 30% haircut. But if you just wanted to flip the shares yet are somehow still sitting on them, that’s simply a busted trade and I’d be looking for the emergency exit.
