News Column

Investors face IPO frustration

August 17, 2014

By Matt Krantz, @mattkrantz, USA TODAY



Looks like IPOs should be renamed: OPPs, or Other People's Problems.

Initial public offerings are supposed to be a great opportunity for investors to jump into the ground floor of the next big thing. But it turns out that investors may be buying into companies that are about to disappoint and can't keep up with expectations.

So far, 165 of 244 companies that sold shares to the public for the first time between the second quarter of 2013 and the first quarter of 2014 -- including restaurant chain Noodles, water park SeaWorld and game company King Digital -- have missed earnings expectations in at least in one quarter, according to a USA TODAY analysis of data from S&P Capital IQ and IPOScoop.com.

Seeing so many stumble so quickly only feeds investors' skepticism of the capital markets, especially IPOs. Many newly public companies resort to all sorts of methods to keep their profits looking pretty ahead of an IPO -- only to stumble in a few quarters when public investors are holding the bag, says Jay Ritter, professor of finance at the University of Florida.

"The earnings disappointments usually come later" after the IPO is completed, he says.

Last week was a dramatic example of how new stocks stumble soon after the public buys in. Take Noodles, which operates more than 400 restaurants. Investors piled into the IPO in June 2013 and drove the shares to almost $37 on their first day of trading in June 2013 from the offering price of $18. Wednesday, the company reported earnings 27% below expectations, sending the stock tumbling. The stock closed Friday at $20.98 -- 43% below its first-day close.

At King Digital, the maker of the popular game Candy Crushfell 16% in its first day of trading in March from the $22.50 IPO price. Late Tuesday, it reported disappointing earnings. Friday close: $13.53.

SeaWorld rose 24% its first day of trading in April 2013, to $33.52 from its $27 IPO price. Its earnings last week missed by 20%. Friday close: $18.66.

Since officers and directors can't usually sell for six months after the IPO, many try to hold things together until their third quarter as a public company, Ritter says, not citing specific examples. Companies want to avoid disappointments for at least six months so that venture capitalists can cash out before any problems, and the lock-up period for executives to sell is lifted, he says.

Seeing so many IPOs miss expectations this quickly is a reminder of how IPOs aren't necessarily designed to make investors rich, but allow insiders an exit. "The real earnings disappointments come in the next year or two," Ritter says.


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Source: USA Today


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