How to Pick the Good IPOs from the Not-So-Good

By Matt Krantz from Investing Online For Dummies, 8th Edition

The websites listed in the preceding section provide data and commentary about initial public offerings (IPOs) to help you find the ones with the best prospects. Even so, IPO investing is tricky. Pros look at many things when evaluating an IPO’s potential, but a few things you should ask yourself include

How stable is the company? The company’s prospectus shows you how much revenue and earnings the company has generated over the last couple of years. You should look to see whether the company is profitable and growing.
How expensive is the stock? A company will constantly revise its prospectus as the IPO nears. One thing a company will disclose is the expected price range for the stock, which is how much it expects to sell the shares for. Renaissance Capital also provides an IPO’s expected price range when it becomes known. Take the time to evaluate the price and determine the company’s valuation.
Does the management have a stake? It’s a good idea to scan through the prospectus and see how the company’s management is paid. Some professional IPO investors prefer companies where the management team holds a large position of stock. That can be a sign that the top management still believes in the company’s future.
What is the company planning to do with IPO cash? The prospectus must state what the company is going to do with the money it raises from the IPO. It’s best if the money is being used to expand the business, rather than to pay off large investors who want to cash in their stakes.