Book Review: High-Profit IPO Strategies

High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders. 2012. Tom Taulli.

In 1602, Vereenigde Oost-Indische Compagnie, otherwise known as the Dutch East India Company, became the first modern company to issue shares to the public, thus launching the first initial public offering (IPO). Nearly two centuries later, in 1782, the Bank of North America became the first IPO in the United States.

Over the next 200 years, a number of high-profile IPOs, such as Ford in 1956 and Genentech in 1980, captivated the investing public, but these headline-grabbing deals were comparatively rare events. On 9 August 1995, however, all that changed when Netscape ushered in the dot-com boom. The success of Netscape’s IPO, the commercialization of the internet, and the growing number of 24-hour news channels hyping IPOs created a frenzy as the investing public eagerly looked forward to the next big offering.

Despite the enormous success of IPOs by Netscape, eBay, and Amazon.com, initial public offerings remain somewhat mysterious to the average investor. Highly visible offerings have recently been floated by the likes of LinkedIn, Groupon, and Facebook, but most IPOs come to market with far less fanfare, which leads to the question of how to distinguish between the next Amazon.com or eBay and the next Pets.com. In the latest edition of High-Profit IPO Strategies, Tom Taulli, a financial journalist who has written extensively on IPOs, tries to strip away the mystery by taking the reader through the process of finding, analyzing, and investing in IPOs.

Taulli targets the lay investor but also supplies useful insights for professionals who are not well versed in the IPO process. The first of the book’s four parts is devoted to IPO investment fundamentals. Most important for those who are not market insiders, the author offers tips on how small investors can obtain shares in an IPO.

Part 2 covers the tools for analyzing an IPO, including where to find the best information. Even investors familiar with the IPO process are likely to learn about some new and useful information sources. Taulli takes the reader through the details of the prospectus and the factors that need to be considered before purchasing an IPO. He also devotes three chapters to the basics of the balance sheet, income statement, and statement of cash flows. Readers already familiar with financial statement analysis may choose to skip these chapters. However, newcomers to IPO investing will find some useful pointers in the chapter on risk factors.

Although many readers of the Financial Analysts Journal will be familiar with the tools discussed in Part 2, successful investing in an IPO requires a specific understanding of the company’s industry. In Part 3, Taulli provides the greatest value to the seasoned investor, devoting seven chapters to various market sectors.

The key to analyzing any company is finding the correct metrics. Accordingly, Taulli details metrics for the technology, biotechnology, finance, retail, energy, and REIT sectors. In addition to the general metrics, Taulli provides information specific to today’s market conditions. He also includes a chapter on the basics of participating in foreign IPOs.

Although the book’s final part purports to cover “other IPO investments,” only one of the chapters is devoted to that subject. The other chapters cover a hodgepodge of IPO investment topics. For those who would like to invest in IPOs but lack the time or the resources to select individual deals, Taulli discusses the merits of IPO funds, which provide diversification and professional management.

Mounting pressure on CEOs to enhance shareholder value has increased the popularity of spinning off divisions — think Lucent Technologies, Agilent Technologies, and Guidant Corporation. Spinoffs can offer attractive opportunities for the IPO investor. Taulli devotes one chapter to the basics of investing in these transactions.

Fads have been a part of American life for decades, inspiring Taulli to include a chapter on investing in fad IPOs. Some companies, such as McDonald’s, appeared to be fads when they went public but have proved to be mainstays of Americana. Others — including Heelys, a shoe manufacturer that put wheels in the soles — lasted only a short time before consumers became bored with the idea. Although Heelys lacked the staying power of McDonald’s, it still turned out to be a profitable investment for investors who were clever enough to participate in the IPO and cash in their shares in time.

Taulli also provides a brief look at IPO alternatives, including angel investing and crowd funding. Investing as an angel or through crowd funding poses additional risks because much of the information required for an IPO may be unavailable. Entrepreneurs engaged in start-ups may find this chapter as valuable as investors will owing to its detailing of the capital-raising process.

The dream of every investor is to find the next IPO that rises a hundredfold, and Taulli devotes a chapter to this topic. Such companies as Dell, Walmart, Apple, and Microsoft all became 100× investments for investors who stayed with the companies following their IPOs. Using Amazon.com as an example, Taulli lists certain factors that can help investors determine whether the company is a fad or has the staying power to become the next 100× IPO.

Even though much of the unbridled excitement for initial public offerings has waned since the late 1990s and early 2000s, viable private companies that are planning IPOs remain of interest to investors. High-Profit IPO Strategies is a concise introduction for those who want to dip their toes into the IPO waters. Because Taulli has chosen to write a survey rather than a tome, his book is an excellent resource for finance professors who would like to supplement investment textbooks that touch only briefly on the IPO process. Also likely to benefit from reading High-Profit IPO Strategies are professionals at the outset of their careers who contemplate moving into IPO investing, either personally or professionally. Finally, owners of new businesses may find value in the book because it provides insights into raising capital, the IPO process, and the pros and cons of becoming a public company.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.