Shake Shack’s recent initial public offering success, along with many other recent “hot IPOs," makes many wonder about weighing risks and rewards on opening day. It is known as a good thing for the prices of a company’s individual share to close anywhere around or over 25 percent more than the price it was offered at when the company officially goes public. For example, Alibaba, the Chinese equivalent of eBay, was marveled at for closing at 38 percent above its opening price of $92.70. The real question, then, becomes whether or not “hot IPOs” or companies with public offerings, that close significantly higher than their offering price, are worth buying that very first day or even at all.
Although some people are wary about buying IPO stocks due to their uncertain nature, many stocks with huge IPOs, like that of Shake Shack and Alibaba, end up being successful in the long run even if in the first couple months, or even a year, the stock prices are shaky. Peter J. Tanous, chairman of Lynx Investment Advisory explains research he had done on this exact question.
He looked at companies that closed on opening day at least 25 percent above their opening price and were on the market for at least a year. Tanous found that, “Of the 26 qualifying IPOs, 17, or two-thirds, were higher a year later than the closing price on the day of offering. Of the 13 with a two-year record, 11 were higher than the close on their offering date two years or more prior. The two-year results are eye-popping, showing that the vast majority of these hot IPOs turned out to be good investments.”
So in the long run, are all of these “monster IPOs” that hit the markets hard worth the investment? The truth is, not always. “Analyst and investors have been trying to put a valuation on COOL forever, but have yet to do it successfully. We have no idea if this is the Facebook or MySpace of burgers yet,” Turney Duff says in an article for CNBC. That “cool factor” is often what boosts some of the more household names into doubling in value by the end of their opening day. There are often hits, such as Chipotle, or another burger chain called the Habit, whose “shares have risen more than 80 percent from their IPO price since their debut on Nov. 20,” Lisa Baertlein said for Reuters.
Therefore, even though, “Kathleen Smith, an IPO expert and principal at ETF manager Renaissance Capital, agrees, adding that Shake Shack may not be able to cultivate the kind of following it has from New York investment industry types outside of the city,” that doesn’t mean it should deter you from purchasing stock that may reward you in many of the same ways that eating a Shackburger does – very well, I might say. In fact, if you look at companies that some say “failed” in comparison to their IPO, like Twitter or Facebook, they aren’t doing terribly. Yes, they aren’t necessarily seeing continual upwards growth but they’re still trading around the area of their opening prices.
Having faith and investing in a company that has seen tremendous growth in the past few years with the ambition to grow even more so in the near future, is still completely up to you. Truthfully, the best way to go when it comes to IPOs for companies like Shake Shack is to go with your gut. In this case, my gut also makes me want to head back to New York for a Shackburger and a black and white concrete.
Reach the columnist at Kayla.Chan@asu.edu or follow @KaylaRC2014 on Twitter.
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Editor’s note: The opinions presented in this column are the author’s and do not imply any endorsement from The State Press or its editors.
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