Business Investments

STOCK TAKE: WILD OFFERING: Trading in social networking site LinkedIn has been wild since its initial public offering a fortnight ago. Shares opened for trading at $82, way above the $45 offer price, and soared to over $122 before ending the day around $94. This week, the stock has tumbled below the $82 opening price.

Despite meagre revenues, LinkedIn is valued at a seemingly grotesque $8 billion. Valuation arguments aside, many believe it was underpriced by its bankers.

“A huge opening-day pop is not a sign of a successful IPO but rather a massively mispriced one,” said Eric Tilenius, general manager of social gaming firm Zynga.

LinkedIn’s leap is dwarfed by others, however. Chinese search engine Baidu.com soared by 353 per cent on its opening day of trading in 2005. The 10 biggest first-day percentages increases all occurred between 1998 and 2000, as dotcom mania catalysed one-day gains ranging from 386 to 697 per cent.

Many of those names, like theGlobe.com, are now forgotten. Opening at $9, it hit a high of $97 before ending the day at $63. By 2001, however, shares were trading at 10 cents.

LinkedIn shareholders will be hoping that history doesn’t repeat.

DOW CELEBRATES: The Dow Jones Industrial Average celebrated its 115th birthday last week. Such longevity is remarkable, especially considering its obvious flaws.

Unlike the SP 500, which consists of 500 large-cap companies, the Dow is a narrow index consisting of just 30 blue-chip stocks. Many big names – even Apple, the second-most valuable company in the world – are missing from it.

Even worse, the index is weighted by price rather than market capitalisation. A stock trading at $100 will have 10 times more influence on the Dow’s movements than a stock trading at $10.

Caterpillar is the second-highest priced stock in the index and its share price consequently exerts more influence than Exxon Mobil, which has a market valuation six times that of Caterpillar’s.

The moral? Follow the SP 500 and forget the Dow.

HIGH-RISE, LOW RETURN:Past studies have shown that hubristic companies that put their names on skyscrapers and sports stadiums badly underperform the market. Now a new study has found that lousy market returns in general follow the construction of record-breaking skyscrapers.

The study finds that, within three to five years of construction, annual market returns are approximately 10 per cent lower.

Why? “Widespread over-optimism could lead not only to tower-building, but also to overvalued stock markets,” the study warns.