Investor beware: Here are some reasons why you may want to rethink investing in an IPO

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For multiple companies, it’s the moment they’ve been waiting for: The window has opened for them to go public.

You’ve probably heard the names, including Levi Strauss, which made its public market debut this week. Ride-sharing businesses Lyft and Uber, among other companies, are also teed up to go public in the coming months.

But if you’re thinking you want to invest in these stocks, experts generally have one word of advice: Wait.

“IPOs aren’t just about, ‘Oh, I want to invest in the things I know,'” said Kathleen Smith, principal and manager of IPO ETFs at Renaissance Capital. “It’s about, ‘How do I make money investing in these?”

“It doesn’t do any good to own something when you’re losing money in it.”

In today’s market, chances are that buying in on a newly public stock could be a losing proposition. Financial experts say there are several reasons why.

Even though the stock is not yet public, you could already be behind.

Just accessing IPO shares is difficult, Smith noted, because most shares will be allocated to big institutional clients of Wall Street firms.

What’s more, many of the names going public now have waited longer to go public and seen their valuations surge during that time, said Nicole Tanenbaum, chief investment strategist at Chequers Financial Management

Uber and Lyft, for example, are considered unicorns, or startup companies valued at more than $1 billion. Along the way, they have raised large amounts of private funding.

Uber previously raised roughly $20 billion in funding and is eyeing a $120 billion valuation when it goes public. Lyft has raised more than $5 billion and plans to be valued at $23 billion.

“When they do go public, much of the appreciation has already happened in the private markets,” Tanenbaum said. That means that earlier investors, who got in at a lower price, stand to see greater gains.

“The upside for the public investor is much more diminished,” Tanenbaum said.

Some companies that are going public these days — including Levi Strauss and Lyft — are pursuing a dual-class structure. That means that certain investors — notably company management — have preferential shares and voting rights compared to a separate common stock that typically comes with just one vote per share.

“In the long run, it’s not good,” Smith said. “If problems happen with the company, you want to be able to know the founders can’t just do what they want without some kind of checks and balances.”

While many IPOs close up on their first day, that first day pop and subsequent run up is not guaranteed, according to Michael McKevitt, director of financial planning at Guillaume & Freckman.

Think back to Facebook’s IPO in May 2012. The company went to market at a high price and investors suffered losses at the outset.

It took about a year for Facebook’s stock to get back to its opening price. Today, the stock’s performance would be considered a success — as long as you held on.

“Even if you pick the right company, like Facebook, which has done amazingly well, you still had to put up with a 50 percent decline, multiple 40 percent declines, multiple 20 percent declines,” McKevitt said. “How many people bought it and held onto it through all of these moves?”

Investors would be wise to keep in mind that the lock up period could affect the stock price, said Megan Gorman, managing partner at Chequers Financial Management.

Lock up periods are a set amount of time, typically three to six months, when large shareholders are prohibited from selling their shares following an IPO. Once that time is over, that can sway the stock price.

“You can sometimes see the stock price has a pull back — not always, but there can be — when the lockup ends,” Gorman said.

All of those considerations mean one thing: Investing in a newly public company might not be the right decision for you — at least for now.

“If you want to be the guy or gal at the cocktail party or the golf course saying that you bought one of those unicorns when they IPO’ed, as long as you go in with the expectation that it might not be the best investment you ever make … that’s great,” Gorman said. “But if this is your retirement money, if this is all of your savings, going in an IPO doesn’t make sense from a big picture perspective.”

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Ultimately, you can eventually get exposure to these companies by investing in mutual funds. Renaissance Capital offers an ETF that consists of a basket of newly public companies. Companies Lyft and Uber will be candidates for inclusion in that fund once they start trading, Smith said.

Waiting for the shares to come to your price can often be the best strategy, according to experts.

That’s what McKevitt said he encouraged one client to do when he inquired about investing in Lyft’s IPO.

“You have to wait several months at least for more market participants to assess the stock,” McKevitt said. “Once it starts trading over that amount of time, it’s more likely to get a fair price.”

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