The launch of an initial public offering creates excitement but also risks.
An IPO lacks several key tools investors use to evaluate a stock.
On its debut, the stock lacks a 50-day and 200-day moving average. Daily also is hard to read. An early surge can obscure where the average will settle. An Accumulation-Distribution Rating is missing. Reports of fund activity also will take time to appear.
IBD suggests investors wait until a stock forms an IPO base, which can be shorter than normal. If the base takes time to develop, that's good. The missing tools mentioned above could become available.
Yet when buzz surrounding an IPO is running high, some individual investors have no interest in waiting for a base to form.
Sometimes this early enthusiasm is because people get excited about IPOs when the business has day-to-day familiarity.
Facebook (FB) was such a stock when it debuted in May 2012.
The buzz started well before the IPO. In October 2010, one tech journalist wrote that Facebook's revenue "will be bigger in five years than Google is right now.
The key phrase there is "will be." Savvy investors are more interested in the here and now. "Will be" scenarios are speculation.
Fund managers, the real market movers, generally prefer proven winners.
When Facebook debuted in 2012, revenue growth had declined for five consecutive quarters — from 276% to 112%, 108%, 104%, 55% and 45%. The earnings growth trend was just as bad, if not worse: from 300% to 175%, 100%, 100%, 25% and 9%.
Still, a Sterne Agee analyst initiated coverage with a buy rating even before the IPO was priced.
Morningstar was wary. It noted a lack of clarity on return on investment for Facebook advertisers. Morningstar added that founder Mark Zuckerberg has voting control: The board of directors can put few checks on him.
IBD warned five days before Facebook's IPO that, "Stripping away the emotion and hype, the financial performance of Facebook is disconcerting.
The stock debuted with an ugly negative reversal 1. By early September, the stock traded as much as 61% off its opening-day high 2. The stock has recovered mildly but is still 45% below its post-IPO peak of 45.