Space Exploration Technologies Corp (SPCX) — or SpaceX — is now what Wall Street calls a “broken IPO,” meaning a stock trading below its IPO price. The company was valued at $135 in the largest IPO in history. The stock’s first trade on June 12 was $150, and it closed just above $200 on that day. Since then, however, it has fallen back to Earth and even investors who got in at the IPO price are now at a loss.
The IPO price is a psychological benchmark that traders anchor to as a fair valuation. Falling below this level can cause the belief that the stock was overhyped causing selling pressure and a reluctance to purchase the stock until it settles. Additionally, institutions who got in at the IPO price are now in a losing position and may look to sell shares on any rally back toward that level.
This week I’ll look at other broken IPOs and see if we can determine the chance of further losses compared to overtaking that important IPO price.
Looking at Broken IPOs
We’ve been tracking the major IPOs for some time now. Our list is by no means a comprehensive list and consists mainly of more popular IPOs. Survivorship bias is also prevalent in the list since it includes only stocks currently trading. Despite that caveat, I think this is an insightful study.
Using the list of IPOs, I identified instances in which a stock closed at least 25% above its IPO price and then, at some point within the next six months, closed below its IPO price. The table below summarizes the stock returns after a signal was generated. The second table shows what returns would have been achieved by purchasing the S&P 500 Index instead.
Based on the table below, expect a lot of volatility. These stocks performed well in the short term based on the average return. Purchasing the stocks led to an average return of more than 7% in the first month. However, only about half of the returns were positive and fewer than half beat the S&P 500 Index. The average return was bullish due to the large upside in the winners. The positive stocks gained 28% on average over the next month and losing stocks fell 15% on average.
The longer-term returns are still very volatile but less bullish as far as average return. Purchasing these broken IPOs in these situations would have averaged a six-month return barely above breakeven. The median return was -13%. Not even a third of the returns were positive or beat the S&P 500. The only bright side over the six-month timeframe is that if did land on a winner, it averaged a return of over 60%. Purchasing the S&P 500 Index instead would have returned 7.4% on average with 74% of the returns positive.
