Should you invest in companies that have just gone public? Should you invest in the hype?
What is an IPO?
Initial public offering (IPO) or stock market launch is a type of public offering in which shares of a company are sold to the public. Companies use an IPO to raise money for growing their business. Once a company goes public, it is able to issue more shares in the future if it needs to raise more money.
What's the Hype?
IPOs are generally preceded by media hype, this is designed to generate demand for the company's shares. Think about the media hype surrounding the IPO of Facebook, Twitter, Tesla, and many more companies in recent history. An IPO is designed to help the company raise has much money as possible, the timing of the IPO and the surrounding hype is designed to attract more money.
Snapchat's stock surged in its debut as a publicly traded company on March 2, 2017 after raising a greater than expected $3.4 billion in an initial public offering. Shares of Snapchat opened for trading at $24, up about 41% from the IPO price of $17 apiece. At the opening price, Snap had a valuation of about $33 billion. Today its stock is trading at $6.35.
Founded in 2011, Snapchat is a popular mobile app that allows you to send videos and pictures, both of which are deleted after a few seconds of a person viewing them. But was the company really worth $33 billion? Compare this to a Canadian food retailer Loblaw which is worth $29 billion, was founded in 1956, has 195,000 employees, and operates more than 2,400 independent and corporate-owned grocery stores and pharmacies. I’m not sure if Snapchat will still be around in another 25 years, but I’m confident Loblaw will still be here.
What then to invest in?
Focus on building a diversified portfolio of quality stocks. Think about the essentials in life that you consume/use each day. Food, electricity, water, fuel, telecommunications (cell phone, internet), banking services, insurance (car/home/travel/health insurance). Then consider the companies that provide those essentials products and services. These are companies that are basically recession proof. Even when the stock market is down you will still need to eat, heat your home, pay your mortgage, and drive/bus to work.
Slow and steady provides long-term results. We focus on buying quality companies when they are undervalued, and we use the 12 Rules of Simply Investing to find companies like this:
$4835 invested in Lowe’s (LOW) in 2011 would be worth $23957.50 (including dividends) today (in 2018), representing an increase of 395%. The dividend yield based on the original purchase price would today be over 9.9% today (in 2018).
Investing in an IPO can be risky. IPOs are timed to be issued when the company feels they can raise the most money. But we as investors look to buy stocks when they are undervalued not overvalued. Stay focused on building long-term wealth, and leave the IPO hype for the media to report on.
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