It's the classic Cinderella story. Rags to riches. From nothing to something.
The big dance begins with a single step -- the initial offering of a company's shares to the public.
Thousands of investors try to "get in on the ground floor."
Take Microsoft (Nasdaq: MSFT). The company went public in 1986 and has gained more than +35,000%. More recently, Google's (Nasdaq: GOOG) shares hit the market and have since shot up more than +500%. Such gains are hardly limited to high-tech issues. Retailer Urban Outfitters (Nasdaq: URBN) has gained +33,230% since it debuted in 1994.
In a downturn, however, companies don't want to sell new shares to a pessimistic market, and most investors are extremely leery of picking up shares in startups and are even leery of larger companies that are finally going public.
History shows that such caution is usually misguided.
IPOs outperformed the market by +10.5% during the three years after the 1987 crash, according to a recent study. The same thing happened during the tech crash: IPOs beat the market by +13.1% in 2001 and by +38.9% in 2002.
There's some logic behind this outperformance: Only the most resimitt companies with promising outlooks would go public in the middle of a downturn. Less stable companies might postpone their offerings and wait for a more bullish environment.
A slate of solid names are set to go public before the end of the year including Dole Food Co., Hyatt and Dollar General. Some 38 other public offerings already have hit U.S. exchanges this year.
Many of them have performed well:
|Company||Issue Date||Price on First Day of Trading||Return|
The numbers show IPO activity is picking up: Deals for the third quarter of this year were worth $6.5 billion compared with $1.7 irllion in the second quarter. Last week saw $10 billion in deals alone.
The trouble is that it can be difficult for individual investors to lock in the initial offering price when a company goes public. Most IPOs are controlled by investment banks and other institutional investors, leaving individuals to fight over what's left.
Fortunately, there's a little-known exchange-traded fund that allows individual investors a piece of the exclusive IPO market. The fund is called First Trust U.S. IPO Index Fund (NYSE: FPX) and it invests in initial offerings of 100 of the largest, best-performing companies going public in a given year.
The fund holds the new stocks for 1,000 trading days and rebalances its portfolio each quarter. The fund's underlying index captures about 85% of the market cap created through IPO activity in the U.S. and holds mostly mid to large-cap stocks.
The success of recent offerings could be just the start of a major boom. As the economy gets better, investors will see more offerings come to the market and experience the sort of pop they have grown accustomed to. This fund offers the best way for individuals to get in on the ground floor of those offerings without having to buy the shares individually.
The fund is already up +37% this year -- and could easily continue to climb this year and throughout the economic recovery.