How to Read IPO Multiples and Their Significance

Analyzing how stocks do when trading at psychological multiple points

Rocky White
May 6, 2020 at 8:11 AM
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This week I’m looking at how stocks perform around certain multiples of their initial public offering (IPO) price. For example, 50% above their IPO price, double the price, triple the price, etc. Why are these levels significant? They could be popular profit-taking spots for the big players that get in at the IPO price. Additionally, these levels may be psychological points at which investors consider the stock expensive. I have a list of IPOs -- which is by no means comprehensive -- going back several years. Let’s see if some numbers support this theory.

The Numbers Support the Theory

For this study I compiled a list of 131 stocks that have filed their IPO since 2010. The first level I’m studying is 50% above the IPO price. I found stocks that moved to within 2% of this level after trading for a month below it, then summarized the stock returns going forward. Also, the signal had to occur within the first year of trading, so that the IPO level was still fresh in investor’s minds.

When looking at average return and percent positive, the numbers can be skewed if there is a large proportion of signals that occur just before a big market move. Therefore, I believe the best metric for a study like this is to look at the percentage of stocks that beat the broad market. I’ll be focusing on the percentage of stocks that beat the S&P 500 Index (SPX) going forward, which is in the last row of the table.

This analysis supports the theory put forth above; stocks running up to 50% above their IPO level have tended to struggle. You would expect about half of the stocks to beat the S&P 500, but a month after getting to a 50% gain, only 42% of the stocks beat the index. Three months after theses signals, not even 40% of the stocks beat the S&P 500. The worst time frame was the one-week return, where the stocks averaged a loss of more than 1%, only were 39% positive, and just 36% beat the market.

IPO 50 percent

I did the same study looking at a 100% gain (double the IPO price). I figured, psychologically, a 100% profit would be a more significant level than a 50% gain. The numbers in the table do not support that. Looking at the returns from two weeks to three months out, right around 50% of the stocks beat the S&P 500. That’s about what you would expect from a random sampling of stock returns. Looking at the stock returns a week after the signals, 57% of them beat the market. This was a surprise to me.

IPO 100 percent

Finally, I looked at stocks that ran up to triple their IPO level. The number are a little bit mixed. The short-term results looked a bit random, with 48% of the stocks beating the S&P 500. The two-week return showed some bullishness, with 55% of the stocks beating the index. The longer-term returns looked more bearish with only 38% of the stocks beating the S&P 500 after three months.

ipo 300 percent


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