There were 58 initial public offerings in 2009, up from 43 the year before. The five best performing IPOs averaged a 110% return, which is excellent. However, when compared to IPOs that went public five years ago, the first-year returns are paltry. In 2004, the average for the five best performing IPOs was 226%, twice those of this past year.

But that's not the most amazing thing about the IPO market in 2004. The biggest eye-opener is the number of companies that went public. Exactly 238 raised $45.3 billion from investors and while the dollar amount isn't earth shattering, the sheer number of IPOs is. That kind of IPO production may never be seen again. And that's not necessarily a bad thing because IPO returns after the first year generally disappoint.

IN PICTURES: Biggest Stock Scams

2004's Top Five IPOs By Performance

Company First Year Return Return Since 2004
Shanda Interactive (Nasdaq:SNDA) 286.4% 23.8%
51Job (Nasdaq:JOBS) 271.2% -65.8%
Marchex (Nasdaq:MCHX) 223.1% -75.8%
Volterra Semiconductor (Nasdaq:VLTR) 177.0% -13.7%
Cogent (Nasdaq:COGT) 175.0% -68.5%






S&P 500 N/A -8.0%

The table above shows that four out of five best performers in 2004 seriously underperformed the S&P 500 over the next five years. Only Shanda Interactive managed to eke out a positive return. It's even better if you add in the $10 share price from its 71% owned spin-off, Shanda Games (Nasdaq:GAME), which split this past September. Even so, a majority of the stock's returns came in its first year (286.4% versus 47.8%) with very little to show thereafter. So why would an investor hold a new issue for longer than one year? There appears to be no rational explanation.

Fast Forward To 2015
Let's examine the valuation ratios for five of the top performers in 2009. Ben Graham wouldn't invest in a stock if its three-year average price-to-earnings ratio was greater than 15 and if its P/E multiplied by its P/B was greater than 22. Using the current P/E and P/B and not the three-year average, we can get a starting picture.

On the first screen, only Lihua International and Changyou.com come close to making the cut with price-to-earnings ratios of 15.1 and 15.2 respectively. However, when you multiply these by price-to-book, you get 57.4 for Lihua and 150.5 for Changyou.com. Therefore, none of the five make Graham's list of investment possibilities and when you consider that they've all had a good run in 2009, it makes little sense to hang on to them. (To learn more, check out The Intelligent Investor: Benjamin Graham.)

Top Five 2009 - Current Valuation

Company P/E P/B Total


Lihua International (Nasdaq:LIWA)

15.1 3.8 57.4
Duoyuan Global Water (NYSE:DGW)

24.3

4.2 102.1


Changyou.com (Nasdaq:CYOU)

15.2 9.9 150.5


Mead Johnson Nutrition (NYSE:MJN)

23.5 -13.5 -317.3


SolarWinds (NYSE:SWI)

56.8 21.6 1226.9

The Bottom Line
When you consider there's little chance the markets will have a second consecutive stellar year, it's logical that these high flyers will come back to earth in 2010. Further, the history of IPOs dictates that they do so. If you short stocks, according to Ben Graham, all five of 2009's best IPO performers should be at the top of your list. (For a comprehensive review on valuation ratios, refer to Investment Valuation Ratios: Introduction.)

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