Buying Best IPO Performers of Last Year Can Backfire
Investors are always on the hunt for the next undiscovered stock. What better place to look than the IPO market? Here is the land of newborns, baby stocks newly christened into the world of capitalism and ready to burst with potential growth.
We thought the same, but after analyzing the performance of 2014’s best performing IPOs, we think not. We warn investors that toddler tantrums, schoolyard scuffles and adolescent rebellion often precede the calm and predictable nature of a mature stock.
The top ten performing IPOs of 2014 gained an average of 223% from their IPO price until year end. Every single one of them at least doubled with the top gainer, Radius Healthcare (Nasdaq: RDUS), skyrocketing an astounding 387%. One would imagine these companies’ business models and prospects were well vetted by investors.
Yet in 2015, these ten stocks have returned an average loss of 14%. When digging further into the numbers the carnage is ugly. Of the 2014 top ten IPOs, only four are up in 2015. Of the six decliners, their average loss was 56%!
It can be tempting to jump on board Global Blood Therapeutics (Nasdaq: GBT), the best performing IPO of 2015. The company, whose novel manner intent on discovering therapies for blood disorders, certainly sounds exciting.
But are you smart enough to tell the difference between a Global Blood Therapeutics and Avalanche Biotechnologies (Nasdaq: AAVL) whose stock gained 218% in 2014 only to see it crater 84% this year due to an abandoned clinical trial?
We recognize that biotech investing introduces a whole new level of risk but gut wrenching drops have not been reserved solely for biotechs. Truecar Inc. (Nasdaq:TRUE), who sells sales leads to auto dealerships, has collapsed 74% this year after losing its biggest contract with AutoNation (NYSE: AN). GoPro (Nasdaq: GPRO), the infamous purveyor of thrill-capturing cameras, has dropped 52%.
It’s not that we don’t like IPOs. Depending on the market’s fancy, IPOs can provide solid prospects to investors. Unfortunately, the last two years’ best-loved new issues have been focused on biotech or fast growing companies with little profits. It’s always wise to keep your eyes open for new names but the warning of “past performance is no indication of future profits” is more relevant than ever.