The Arbor Outlook: Dance Moves, IPOs and Going it Alone

“There is movement all around, There is something goin’ down, And I can feel it”
— from “Night Fever” as recorded by the Bee Gees

John Travolta sure could dance. His disco moves helped establish “Saturday Night Fever” as a ‘70s box office smash. Several songs from the movie catapulted to the top of the charts as well. Watching the film now, Travolta looks incredibly young, but back then he personified confidence. Disco moves aside, the actor seemed content to “go it alone” in his movies.

While a sense of confidence is always in style, there are times when it can even help protect your nest egg. Take today’s IPO (Initial Public Offering) market. With a few popular, consumer-facing companies recently going public, being confident in your own investing style can help you keep your bearings when everyone is buying the “next big thing.”

Among all the other factors to consider before making any investment, IPOs typically feature a few additional quirks to consider. For starters, is the reason the company is going public to “cash in” on a great business, or does it reflect a “cashing out” for the current owners? It’s perfectly fine for owners of businesses to sell some stock from time to time; everyone has liquidity needs. But if the current shareholders are using this event to sell most of their financial stakes, that can be a caution flag. It’s usually a far better sign if the company is going public in a move to obtain additional funds to grow the business.

Another peculiarity of an IPO is the public mania that can result. The investment banks hired by the company going public often put together “investor road shows” to gin up support for the offering and to ensure that prospective investors are aware of the potential rewards of buying the stock. These events can have a “Wall Street meets P.T. Barnum” feel to them. After companies have traded on the stock market for a few years, they’ve typically had a few spikes and selloffs and much of the initial “shine” wears off.

These road shows are often very successful in raising awareness of a company’s soonto-be-issued stock and therefore, many lay investors participate. Large institutional investors also participate in IPOs, but the larger, well-connected players typically get to invest earlier and cheaper than can John Q. Public. It’s not necessarily a bad omen to own the same stock as the broader investing public, but the folks who always want to cash in on that “next big thing” are a fickle bunch and might dump their shares at the first sign of trouble. So if you don’t feel confident making that investment, you may want to dance to your own tune.

Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 – www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin.