New IPO

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Michael_Fisher1
Posts: 158
Joined: Thu Sep 25, 2014 8:13 pm

New IPO

Post by Michael_Fisher1 » Sat Oct 04, 2014 11:06 am

Anyone hear of Shake Shack? Its poised to have a very strong 1st day of trading when they go public. How can you find out when a company is set to go public and how do you get in early before trading begins? I cant seem to find much info on this

thanks

John3754
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Joined: Tue Mar 19, 2013 8:56 pm

Re: New IPO

Post by John3754 » Sat Oct 04, 2014 11:12 am

Are you aware of the fact that you're posting on a forum dedicated to the philosophy of investing in low cost index funds and not in individual stocks?

Just FYI.

Michael_Fisher1
Posts: 158
Joined: Thu Sep 25, 2014 8:13 pm

Re: New IPO

Post by Michael_Fisher1 » Sat Oct 04, 2014 11:14 am

yeah i know- was just curious since im starting to learn a lot about investing

toto238
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Re: New IPO

Post by toto238 » Sat Oct 04, 2014 11:40 am

John3754 wrote:Are you aware of the fact that you're posting on a forum dedicated to the philosophy of investing in low cost index funds and not in individual stocks?

Just FYI.
People on here generally don't buy IPOs.

But if you must know, find out who the underwriters are for the IPO and see if you can open an account with them and invest in the IPO through them.

z3r0c00l
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Re: New IPO

Post by z3r0c00l » Sat Oct 04, 2014 11:48 am

Why do you automatically expect this ipo to do well? IPOs don't work well, on average, for individual investors. Incidentally, the restaurants while popular are pretty crummy to wit food quality. They are a pain in the behind to eat at and few non-tourists go to them. Consider that a possible downside.

coldplay221
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Joined: Thu Sep 15, 2011 9:14 pm

Re: New IPO

Post by coldplay221 » Sat Oct 04, 2014 11:49 am

Shake Shack eh? 1 billion valuation?

"That valuation would put it in line with other dining chains that have tapped into investor appetite for new stocks in recent years. El Pollo Loco Holdings Inc. (LOCO), which raised $123 million in July, now trades at about 60 times projected 2014 earnings, while Potbelly (PBPB) Corp. trades at over 64 times estimated earnings, data compiled by Bloomberg show."

Are we there yet? :confused

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SecretAsianMan
Posts: 656
Joined: Mon Mar 05, 2007 11:46 am

Re: New IPO

Post by SecretAsianMan » Sat Oct 04, 2014 12:12 pm

Michael_Fisher1 wrote:How can you find out when a company is set to go public and how do you get in early before trading begins? I cant seem to find much info on this
Anyone asking this question has no chance of getting an IPO allocation. Sorry.

The burgers at Shake Shack are amazing. That being said, I would never invest in the stock, or in any individual stock for that matter. Judging from your prior posts on BH, you seem to be drifting about and need a firmer foundation when it comes to your investing policy. I suggest you pick up a copy of the new edition of the Bogleheads' Guide to Investing or any other of the fine books on the Bogleheads reading list and really internalize the information.

SAM

chead
Posts: 45
Joined: Fri Jul 26, 2013 2:08 pm

Re: New IPO

Post by chead » Sat Oct 04, 2014 12:58 pm

SecretAsianMan wrote:
Michael_Fisher1 wrote:How can you find out when a company is set to go public and how do you get in early before trading begins? I cant seem to find much info on this
Anyone asking this question has no chance of getting an IPO allocation. Sorry.
Might be a good time to a quick IPO 101. (note: I haven't been involved in these in a few years, so others correct me if I get anything wrong)

When Shake Shack decides they want to go public whether to raise money for the company or to cash out the founders, they hire an investment bank (or usually a lead IB plus a few others as secondaries). It's the job of the investment bank to generally guide the company through the IPO process (e.g. choosing which exchange to list on). However, their prime function of the IB is to actually pre sell all the shares before the actually IPO. They do this by creating all kinds of fancy powerpoint decks, coming up with an initial price and then accompanying the company's management all across the country meeting with big institutional investors getting them to sign up for a certain number of shares. The company wants this initial price set as high as possible since it means more money for them and the institutional investors want to set it as low as possible. The investment bank sits in the middle trying to keep everyone happy and hoping that it's reputation doesn't get ruined (see Morgan Stanley & Facebook's IPO as an example).

Seems pretty straightforward, right? Well, the problem is the investment banking is a "relationship business" which means they are constantly doing favors for their clients and asking for favors in exchange. They might "force" a big mutual fund to sign up for extra shares on a real stinker of a IPO and in exchange allow them an extra big piece of the pie on the next good deal. Additionally, the bank is thinking about what other services they can sell to the company (e.g. future debt offerings) or the institutional investors (e.g. prime brokerage services) and how currying favor now might payoff in the future.

So if you still want in an IPO you can call up your broker as they've probably signed up for some shares in the IPO which they reserve for their best brokerage clients. In the case of Shake Shack, JPMorgan and Morgan Stanley are leading the IPO and most likely have the most shares available to their clients.

The problem is you, as a small investor, just don't have any transparency into all the maneuvering laid out above. A good company at a bad price is not a good investment.

ny_rn
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Re: New IPO

Post by ny_rn » Sat Oct 04, 2014 2:11 pm

I live in NY and can count the number of times I've been to Shake Shack on one hand. Each time I was with family or friends from out of town. Not impressed with the food.

The old me would try to invest in this company. Now, I follow the Boglehead philosophy. I would take that Shake Shack IPO money and dump it into my VTSAX account.

I suggest you read jlcollinsnh "stock series": http://jlcollinsnh.com/stock-series/

Bubbagump
Posts: 61
Joined: Thu May 09, 2013 11:42 pm

Re: New IPO

Post by Bubbagump » Sat Oct 04, 2014 6:00 pm

chead wrote:
Might be a good time to a quick IPO 101. (note: I haven't been involved in these in a few years, so others correct me if I get anything wrong)

...
The problem is you, as a small investor, just don't have any transparency into all the maneuvering laid out above. A good company at a bad price is not a good investment.
All of this and more. SOOOOO... Step one as Chead mentioned is getting an investment bank. The investment bank does a few things. Firstly you run a round of "fund raising" when the bank/banks/VC/PE guys buy a pile of your private shares at a valuation. This valuation is going to be low compared to the P/B and P/E they think they can get for the IPO. So say they give your company a valuation of $400mil, maybe they buy $200 or $202MM worth of private shares from the founders, existing VCs, investors etc. In some cases they want majority ownership, in other cases not. That is really a call based on the perceived strength of the business and existing management team. So they now have a percentage of the private stock with a low cost basis which we shall see will be converted to public stock later on. So while the bank acts as an underwriter, they really look to make a profit and the underwriting is totally in their favor as a means to get the price up.

So time passes. The investment banks do all the things Chead says and run a "road show". This is where the investment bank goes out and gets essentially a promise from big institutional investors that they will buy huge blocks of shares on day one of the IPO. Then based on this response, there may be additional rounds where the IPO price is adjusted (see all the articles on Alibaba where it went from like $22 to $26 or whatever before the IPO). The more excitement in the road shows phase, the more they can get the IPO price up. This is called the primary market.

Then, on IPO day the investment bank goes and sells their heap of share they bought at $200MM and later in the day as they see how things pan out they'll move some of the shares to the secondary markets. This is where the underwriting is important. They want the IPO to be priced at that exact point where they can get the most for their shares possible and not have any left over. Maybe the IPO valuation becomes $2Bln at this point and they make $800MM on their $200 MM investment. The other shares are still owned by founders, initial VCs etc and are then sold on a schedule. Then what you and I know as a stock market (NYSE, NASDAQ) buys and sell the shares that the institutional investors or insiders want to sell later on as well as the left overs the investment bank didn't sell in the IPO. These markets are known as secondary markets.

That's an IPO. The important piece to realize is we are typically converting private shares to public shares and valuations mean everything. The road shows determine this.

To tie this back to something else, read Random Walk and an IPO very much lives in the Castle in the Air theory. Sure, firm foundation and fundamental analysis is part of the IPO equation, but there is A LOT of hype and favors involved in the primary market. Thus, unless you are an insider, IPOs are typically not a great idea.

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linenfort
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Re: New IPO

Post by linenfort » Fri Jan 30, 2015 9:04 am

Michael_Fisher1 wrote:Anyone hear of Shake Shack? Its poised to have a very strong 1st day of trading when they go public. How can you find out when a company is set to go public and how do you get in early before trading begins? I cant seem to find much info on this

thanks
Trades today at SHAK, Michael. Resist the dark side. Go with Vanguard Total Stock Market!
I shy away from IPOs as much as anyone posting above, but as a burger lover, I'm glad I live within walking distance of a Shake Shack.
Love it.
bogleheads, don't knock state lotteries. They helped defund the mafia.

Fclevz
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Joined: Fri Mar 30, 2007 11:28 am

Re: New IPO

Post by Fclevz » Fri Jan 30, 2015 9:39 am


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