Evaluating IPOs in Today's Saner Market Environment

by Robert Bridges and John Huber

Many investors “swore off” initial public stock offerings after so many IPOs collapsed in the 2000–02 bear market.

But 2004 saw a resurgence of interest in IPOs (initial public offerings). Renaissance Capital’s IPOHome.com reported a total of 216 IPOs, the highest since 2000, raising $43 billion (see Table 1).

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Robert Bridges is a principal of Geneva Investment Management of Chicago, LLC, an independent investment management firm located in Chicago and owned by its professionals. Geneva provides fee-based customized portfolio management services to individuals and institutional clients throughout the U.S. Geneva can be reached at 800/505-1720 or through its Web site at www.gimllc.com.
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John Huber is a principal of Geneva Investment Management of Chicago, LLC, an independent investment management firm located in Chicago and owned by its professionals. Geneva provides fee-based customized portfolio management services to individuals and institutional clients throughout the U.S. Geneva can be reached at 800/505-1720 or through its Web site at www.gimllc.com.
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The most recent resurgence appeared to be along more traditional lines. Investment bank standards for IPOs had declined over 30 years from a minimum of four years of corporate profitability to little more than a good business model—if that—by the late 1990s. In 1999 and 2000, only a quarter of IPOs were by profitable firms. In contrast, 63% of IPOs in 2004 were from companies generating a profit. Another healthy contrast with the 1990s is that recent IPOs have been diversified across industries instead of concentrated in technology.

The IPO resurgence has lost only a little steam in 2005. IPOHome.com reported a total of 146 IPOs through mid-October, down from 151 over the same period in 2004, raising $27 billion.

Yet many individual investors are still leery of IPOs—they don’t know how to evaluate them, and they fear being played for suckers by insiders.

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→ Robert Bridges is a principal of Geneva Investment Management of Chicago, LLC, an independent investment management firm located in Chicago and owned by its professionals. Geneva provides fee-based customized portfolio management services to individuals and institutional clients throughout the U.S. Geneva can be reached at 800/505-1720 or through its Web site at www.gimllc.com.
John Huber is a principal of Geneva Investment Management of Chicago, LLC, an independent investment management firm located in Chicago and owned by its professionals. Geneva provides fee-based customized portfolio management services to individuals and institutional clients throughout the U.S. Geneva can be reached at 800/505-1720 or through its Web site at www.gimllc.com.

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November 2005 Issue

Asset Allocation
Picking the Right Tax Pocket for Your Assets
A 401(k) plan can help minimize the amount of money Uncle Sam grabs from your pockets. But if you have taxable savings in addition to your 401(k), the best way to limit Uncle Sam's reach is to make sure you are putting the right assets into the right pocket - either taxable savings accounts or tax-deferred 401(k) accounts. A look at how to make the "asset location" decision.

Stock Strategies
The IPO Prospectus: How to Read the Fine Print
With hundreds of IPOs to choose from, how do you sort among the rubble to find the gems? Start with the prospectus, which covers most of the important areas you need to focus on. What to look for in an IPO prospectus.

Stock Screens
Getting Your Money's Worth: Screening for Return on Equity
Return on equity (ROE) is a popular measure of profitability and corporate management excellence. How to screen for stocks with strong and solid ROEs.

Insurance Products
Tax-Advantage Opportunities With Cash Value Life Insurance
Life insurance has exceptional income tax characteristics that are sometimes overlooked by advisors focusing only on term insurance. A look at three situations where the tax advantages can benefit your portfolio.

Hot Links
Web Sites for IPOs
The Internet can keep you informed about IPOs, offering everything from IPO descriptions and pertinent dates to follow-up data on how the stock performs after the first day of trading.

Portfolio Strategies
Tax-Efficient Investing: Picking the Right Pocket for Your Assets
If you want to keep Uncle Sam’s fingers off your assets, you need to put them into the right tax pocket. A look at the third principle of tax-efficient portfolio management: How to decide which assets should go into your tax-deferred and taxable accounts.

Mutual Funds
Capitalizing on the Index Fund Advantage
Stock index funds offer rock-bottom expense ratios, tax efficiency, diversification and simplicity. But how do you sort through the myriad stock index funds and the numerous stock indexes they follow? An investor’s guide to indexes and index funds.

Stock Strategies
Evaluating IPOs in Today's Saner Market Environment
Many investors swore off IPOs after so many collapsed in the 2000–2002 bear market. But the last two years have seen a resurgence of IPO offerings. How can individual investors take a sober look at IPOs in today’s saner environment? As with all investing, caveat emptor rules. How to evaluate an IPO.

Departments
AAII Journal 2005 Index of Articles
An index of all articles appearing in the AAII Journal during 2005.

Departments
Briefly Noted
Current news items of interest to individual investors.

Departments
Letters to the Editor
Member questions and comments on recent AAII Journal articles.

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