The IPO Buzz: When Price Predicts Performance

In short, all you need to know about an IPO’s opening-day performance can be found on the cover page of its final prospectus.
 
There are only three ways to price an IPO: (1)below its original terms;(2)within its original range;(3)above its original range.
 
Each type of pricing usually affects an IPO’s performance on its first day of trading. Compare the IPO’s final offering terms with its original pricing terms.
 
Let’s take a look at 2014.
 
For the record, 268 IPOs were priced during 2014, according to the U.S. Securities and Exchange Commission filings.
 
(Note: Other services have and will report other numbers, but IPOScoop.com excludes bank conversions; best efforts offerings; closed-end funds, and foreign companies pricing public offerings of American Depositary Shares (ADS) being offered for the first time in the U.S. capital markets. (These ADS represent shares already being traded in their country of origin.) Unit offerings consist of common stock and warrants.)
 
A Double-Digit Gain
The 2014 IPO Scorecard for its 268 IPOs:
  • 110 IPOs were priced below their original filing terms.
  • 82 IPOs were priced within their original filing terms.
  • 76 IPOs were priced above their original filing terms.
The average opening-day gain was 15.9 percent for all 268 IPOs.
 
By the way, the 2014 average opening-day gain of 15.9 percent was far, far from the frothy days of 1999 when an IPO’s average opening-day gain was 77.0 percent. Yes – 77 percent. And in 2000, the average opening-day gain was 68.5 percent.
 
 
It’s ECON 101
Now let’s go back to the present and the 2014 IPO Scorecard.
 
The IPOs priced “below range”
When an IPO has to reduce the number of shares being offered and/or its price, this is ECON 101 – oversupply versus limited demand. Down goes the price.
 
Check the final pricing terms with the original proposed terms. If priced “below” those terms, then the deal could struggle when it starts trading in the aftermarket.
 
Scorecard for IPOs priced “below range” in 2014:
  • 53 of the 110 IPOs closed above their initial offering price.
  • 47 closed below their IPO price (losers).
  • 10 finished unchanged.
Now hang on to your hats: The average opening-day gain for the 110 IPOs priced below their original filing range in 2014 was 1.71 percent.
 
The deals’ prices had to be cut due to limited demand.
 
Time to trot out the old saying: “Cut a deal (an IPO’s number of shares and/or its price), cancel my order.”
 
The IPOs priced “within range”
Check the final pricing terms with the original proposed terms. If priced “within” range, expect a modest opening-day gain.
 
Scorecard for IPOs priced “within range” in 2014:
  • 58 of the 82 IPOs closed above their initial offering price.
  • 21 closed below their IPO price (losers).
  • Three finished unchanged.
The average opening-day gain for the 82 IPOs priced within their original filing range was 7.52 percent.
 
The IPOs priced “above range”
When an IPO increases the number of shares being offered and/or its price, this is ECON 101 – limited supply versus overwhelming demand. Up goes the price.
 
Check the final pricing terms with the original proposed terms. If priced “above range,” expect an opening-day pop.
 
Scorecard for IPOs priced “above range” in 2014:
  • 71 of the 76 IPOs closed above their initial offering price.
  • Four closed below.
  • One finished unchanged.
The average opening-day gain for the 76 IPOs priced above their original filing range was 36.7 percent.
 
As the old saying goes: “Increase a deal. Double my order.”
 
As we count down the final days of 2014, thank you for your support of IPOScoop.com. Happy New Year to all!
 
Stay tuned.
 
Disclosure: Neither the author nor anyone else on the IPOScoop.com staff has a position in any stocks mentioned, nor do we trade or invest in IPOs. The author and IPOScoop.com staff do not issue advice, recommendations or opinions.