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Facebook about to meet the ugly truth about IPOs

Screens outside the Grauman's Chinese Theatre on Hollywood Blvd. advertise for people to "Become a Fan" of the theatre on Facebook in Los Angeles, Monday, May 14, 2012.

Danny Moloshok/AP/Danny Moloshok/AP

Just how different is Facebook Inc. from other initial public offerings? Oh, it's big alright. And yes, it's getting a lot of publicity. But in sizing-up the social media site as an investment, you have to wonder whether it will perform much differently from other IPOs.

Let's hope so, because the track record for IPOs isn't good – despite a common belief that some new stocks can turn in impressive first-day pops and others can go on to reward early believers with stellar long-term gains.

But the average performance is actually far from impressive, as the Bloomberg IPO index suggests. The index tracks the performances of stocks during their first publicly traded year, weighting them according to their market capitalization. The minimum threshold for inclusion requires a market cap of at least $50-million at IPO time.

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Right now, there are 116 members in the index, topped by Delphi Automotive PLC, Groupon Inc., Michael Kors Holdings Ltd. and Dunkin' Brands Group Inc. Given that Facebook could raise as much as $16-billion in its IPO, it will soon top the index with a weighting of about 14 per cent.

But what's more important here is that the performance of the Bloomberg IPO index makes you wonder what all the hoopla is about IPOs. In 2012, the IPO index has risen 1.9 per cent, lagging the S&P 500 by about 4 percentage points. Over the past 52 weeks, the IPO index has fallen 22 per cent, versus a relatively flat performance by the S&P 500. And over the past five years, the IPO index has fallen 16.1 per cent, trailing the S&P 500 by 4 percentage points – and by nearly 10 percentage points if you factor in dividends.

In other words, despite all the excitement about new stocks, they tend to underperform a broad index of blue-chip names, many of which have been around for decades.

Exceptions? Oh sure, there are plenty of them, just as there are plenty of exceptional stocks within the broader stock market. In the social media landscape alone, LinkedIn Corp. popped nearly 50 per cent in its first day of trading in May 2011 and is now up nearly 150 per cent from its IPO price. There are flameouts, too, though: Groupon has fallen 37 per cent from its IPO price and is now 52 per cent below its first-day closing price.

Investors now have to ask themselves where Facebook is likely to fit in after it starts trading on Friday. If it is merely a typical IPO, things don't look particularly good for the stock, at least in its first year of life.

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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