In general, IPO investing is not a very rewarding experience. If you can get in on a hot deal at the offering price, then obviously you can make good money, but studies have shown that recent IPOs lag the market in general after they are available to the public. The reason is pretty simple. More often than not, corporations will choose to sell stakes in their companies when they think they can get a very good price. If the firm gets a good price by selling, investors certainly can’t expect to get a good deal when buying simultaneously.
Now, this is all generally speaking. Of course, there are plenty of IPOs that are selling stock because they have reached a certain size and are seeking a way to fund growth. If they succeed in growing as they plan, investors could make very good money investing early on. A recent IPO that I think is worth watching is SandRidge Energy (SD), a natural gas producer run by Chesapeake Energy (CHK) co-founder Tom Ward.
As I have written here before, I am a big fan of Chesapeake as a long term play on the domestic natural gas market. As far as I can tell, they are the best company in the business, and are currently the leading independent natural gas company in the country. CHK was co-founded by Tom Ward and Aubrey McClendon in 1989 and until last year they ran the company together, Ward as COO, McClendon as CEO.
Initially there was worry when Ward left Chesapeake, but as time went on it became clear that he wanted a new challenge. Now he is running SandRidge Energy, a smaller but rapidly growing firm focused on Texas exploration. Is the fact that a very smart and successful guy like Ward is at SandRidge enough of a reason to buy the stock? In my view, it very well could be. When you have someone who has been as successful as anybody at finding natural gas reserves, it bodes very well for a new company he left a great job to focus on.
If you are bullish on the natural gas market long term, as I am, SandRidge is certainly a company to watch. The stock is up nicely from its recent IPO. The stock was initially indicated to price between $22 and $24 per share. Higher than expected demand pushed the offering price to $26 and the stock opened at $32 on the first day of trading. Today it’s trading above $33 per share. I would suggest waiting for a pullback before buying in, but SD is definitely a company to watch as it continues to grow.
Full Disclosure: Long shares of Chesapeake Energy at the time of writing