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Shake Shack gears up for blockbuster IPO

Shake Shack gears up for blockbuster IPO

Shake Shack, a popular New York City-based burger joint, has announced that it has decided to go public. If the reception to the news on Twitter and throughout the financial media is any indication, it will be a highly coveted affair. Founded in 2001 as a hot-dog cart in New York’s Madison Square Park, the concept has expanded to 63 physical locations, 32 of which are licensed to domestic and international operators. Meanwhile, its systemwide sales have gone from $21 million in 2010 to $140 million in 2013.635568641504129697-AP-SHAKE-SHACK-IPO-69685710

It goes without saying that there is phenomenal potential for a company like this. Yet determining whether such potential will translate into outsized returns for early investors is far from obvious. According to Benjamin Graham, the father of value investing and author of The Intelligent Investor, the answer is generally no:

Our one recommendation is that all investors should be wary of new issues — which means, simply, that these should be subjected to careful examination and unusually severe tests before they are purchased.

While the data on the performance of IPOs isn’t conclusive, it tends to support Graham’s warning. Over the past five years, for instance, a composite of IPOs compiled by Renaissance Capital has returned a total of 124%, compared with the S&P 500′s 132%. And data curated by Professor Jay Ritter at the University of Florida leads to the same conclusion. Between 1970 and 2012, Ritter found that IPOs underperformed similarly sized publicly traded companies in the first, second, third, and fifth years after listing. The only outlier, for reasons not immediately apparent, was the fourth year, in which the cumulative return of newly listed companies exceeded that of their similarly sized competitors by 1.8%.

This isn’t to say that the data speaks unanimously against IPOs, as there is conflicting evidence that suggests the opposite. Most notably, an IPO index designed by First Trust, a money management firm headquartered near Chicago, has returned a total of 150% since 2006 versus the S&P 500′s total return of 92%.

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