Though money is a bit tight with student loans, I’m still always on the prowl for investments that look like they’ll be rewarding in the long term. Earlier this month, car sharing company Zip Car Inc. filed plans for an initial public offering (IPO) of stock. After learning that the Massachusetts-based company planned to take its business public, I began to wonder: Would this be a good investment? And since it will be new to the stock market, how do I conduct my research on it? Since pre-IPO companies are hard to research before they’re public and don’t share their numbers with analysts and others, how do you research a company about to go public?
Apparently, Zip Car is popular around college campuses and in cities where parking or owning a car is a hassle. Instead of spending money to rent a car per day, Zip Car members pay a membership fee and can rent vehicles by the hour.
Having lived in Philadelphia and now residing in New York, I’ve been seeing that little green sticker around more and more. Here’s the lowdown when it comes to researching a company that is about to go public.
“You’re not going to worry about buying those IPO shares, you’re going to assess them when they start trading,â€ says Kathy Smith, principal at the Connecticut-based Renaissance Capital, a firm that specializes in researching IPOs. Since its usually difficult for individual investors to get in on the actual IPO, it’s better to pay close attention to the stock as it starts trading, she adds, noting that most IPOs don’t usually rise more than 15% in share price from the first day they trade. But since the company is new to the market, here are a few things we must pay attention to.
Look at governance — “In a brand new IPO, management does not have a track record yet of delivering earnings,â€ says Smith. So, it’s important to check out the board of directors and management. Are they shareholders? Is management over compensated? Are there outside directors on the board? Smith says at least one of the members of the board of directors should be independent. Is management devoting 100% of their time to the company or are they managing outside companies as well? Finally, insider selling is another factor potential investors should look into when researching a company that is planning on going public. “If investors are selling at the time of the IPO you have to wonder why,â€ says Smith. “If there’s a lot of insider selling at the time of the IPO, that’s a red flag.â€ Smith says all of this information can be found online at FreeEdgar.com in the prospectuses, or in Schedule 1, which the company files with the SEC.
Look at the valuation of a company — It may help give you an understanding of how the company should trade. “We find a good peer group and look at what kind of price-to-earnings multiple it should trade for,â€ says Smith.Â You can sometimes tell how a company will trade by looking at its peer group, she adds.
Look at company track records — Though company earnings may not be public prior to the IPO, it’s still important to take a look at the company’s track record. “You need to ask yourself, ‘What kind of profit margins does the company have?’ ‘Do they have profit margins?’ ‘Is the company a leader in its field?’ Look at the balance sheet and cash flow and see if these numbers make sense.â€ You can also talk to a broker to see if the numbers make sense.
Renita Burns is a writer and content producer for BlackEnterprise.com.