Wednesday, January 16, 2013

Taulli, High-Profit IPO Strategies, 3d ed.

Post-Facebook and pre-cliff, IPOs faltered in 2012. As of December 10, the Bloomberg IPO index was down 3.1% year to date; the S&P was up 12.9%. The major culprit was Facebook. But over the last ten years the index, which tracks the performance of IPOs over their first twelve months as publicly traded companies, is up 164% as opposed to the S&P’s 83%. (Once again, thanks to Bespoke for this data, even though by now it’s a bit stale.) IPOs may still be a potential source for outsized profits, just not for quick automatic profits. The go-go years are gone.

Moreover, fewer deals are getting done. In 2012, 128 companies went public as opposed to 154 in 2011. It was also a year of smaller deals, with median proceeds falling 23%.

Tom Taulli, of course, recognizes this shift in market sentiment. Still and all, IPOs can be attractive investments if you have done your homework and if you either get an allocation (unlikely for the retail investor) or enter wisely in the secondary market. In the third edition of High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders (Bloomberg/Wiley, 2013) Taulli explains the IPO process and the resources that investors can use in their quest to separate winners from losers.

About half of the book deals with the requisite homework: finding the best IPO information; making sense of the prospectus; reading the balance sheet, income statement, and statement of cash flows; risk factors; IPO investment strategies; and short selling IPOs. Another sixty pages is devoted to IPO sectors (tech, biotech, finance, retail, foreign, energy, and REITs). Finally, Taulli looks at alternative IPO investments (funds, spin-offs, angel investing, and crowd funding).

For those who like to dream, there is always the 100x IPO. If you had bought $10,000 in shares on the first day of trading, you would have (as of the writing of the book) $1.3 million in AMZN,$1.5 million in DELL, $1.7 million in AAPL, $3.5 million in MSFT, and $10.3 million in WMT. Even if you had waited a year before buying stock in most of these 100-baggers you would still have made a fortune. Of course, for every mega-winner there are scores of mega-losers. The most often cited example is, but I consider myself a winner here: I never bought the stock and I still have a promotional mouse pad with a photo of my last litter of basset hounds.

Unlike most authors, Taulli has thoroughly updated his book for the third edition. For example, he studies the prospectus of Zynga, the income statement of Annie’s, and the statement of cash flows of Facebook. Under risk factors he cites a slew of reasons that IPOs turned out to be bad investments. To take but a single case, Zeltiq Aesthetics (ZLTQ), which “sold sophisticated machines that it claimed allowed physicians to reduce people’s stubborn fat bulges,” faltered badly because it faced serious competition. “What’s more, the company was also having trouble differentiating its approach. Its advertising campaign, which was called ‘Let’s Get Naked,’ had people running around in their underwear! It was not a clear marketing message.” (pp. 105-106) I must admit that I had never heard of Zeltiq, but its “Z-q” name alone would have given me pause. I don’t think the firm hired the late Michael Cronan (responsible for the TiVo and Kindle names) to brand it.

Taulli’s book is thorough, informative, and well written. Anyone who’s interested in IPO investing, especially in avoiding pitfalls, can profit from it.

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