The stocks that see spectacular gains on the day of their initial public offerings usually fare the worst in the longer-term, according to a study by CommScan, a New York-based research company. The study shows that those stocks that performed the best on their first day of trading performed the worst over the next six months. The study was based on 2,118 IPOs between January of 1994 and August of 1997. Issues that gained over 50% in their maiden session were down 4.2% on average over the next 180 days, with a median decline of 15.4%. By contrast, those that gained under 50% were up 10.5% on average, with a median of 4.8%. Those shares that lost ground on their first day of trading went on to return an average of 3.9%, with a median loss of 5.4%. The research seems to bear out the fact that certain in-demand IPOs can create such a feeding frenzy that investors pile on without paying enough attention to the fundamentals of the business they’re investing in. Later – especially after a couple of quarterly earnings reports – corrections inevitably occur to bring about a more reasonable valuation. Over a full-year period, stocks that rose more than 50% in the first session lost an average 21.4%, with a median loss of 34.4%. Gainers of less than 50% rose 13.8%, with a median increase of 3.3%. First-day losers went on to return 11% over the remainder of the year, with a median loss of 6.9%. Big gains on the first day of trading have largely skewed long-term returns on the new shares. Overall, during the aforementioned 1994-1997 time period, IPOs have gained 32.9% on average after one year, with a 10.6% median return. But when one looks at the change between the first day’s close and the end of one year, IPOs have averaged a return of negative 5.1%, with a median loss of 27% – during one of the biggest bull markets in history, where the Dow averaged a return of 21.3% per year and the Nasdaq 20.9%.
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