The Excitement of IPO's

SNAP IPO

I’ve received numerous emails asking my thoughts on the Snap IPO last week.  So I’ve decided to tackle the question of investing in IPO’s in general.

Let's take a look back before looking forward to SNAP.

In August of 2004, Google went public with huge Institutional interest.  Google at the time had outstanding fundamentals and a sure lock to be the leader in online search.  Google didn’t disappoint, from its IPO debut in August till the end of the year, Google climbed without even a hiccup until late in the year before finally consolidating.

It’s important to remember, we as stock investors want to put the odds in our favor as much as possible.  The key to knowing when to buy is when a fundamentally sound stock breaks out of a proper base or chart pattern.  We also like to see a history of price action, particularly a prior uptrend.  This prior uptrend proves that a stock has “legs”, the power behind it to possibly take it higher.

Back to Google.  Again after consolidating, patient investors that follow sound investments rules now had the ammo and confidence to invest money in the newly issued company.  Google now had a prior uptrend, set up a proper base and broke out at a little over $200 a share in April of 2005.  It exploded out of its base and continued to climb to $475 a share by December of ’05. 

Pro Tip:  It always pays to invest in a stock that has a prior uptrend and breaks out of a proper base, even if it means you pay a higher price.  Another thing to remember is that all stocks have their own personalities.  Some stocks are slow and tend to trend with very small spreads (the difference between the highs and lows for the day.)  Other stocks can have wild ups and downs and huge spreads.  One is not better than the other, just a different personality.  This again is why it is important to sit back and watch and observe an IPO.  You have no idea what kind of “normal” or personality the stock will have.  One of the keys to making money in stocks is to observe when Fundamentals, technicals and Price/volume action all of sudden start to act abnormally. 

The truth of the matter when it comes to IPO’s is they are typically a suckers play during their initial debut.  What???.  Us little pions do not have enough money to get shares of an IPO before they actually start trading.  The big boys get allocated shares and a few lucky well-connected Brokerage clients sometimes do as well.  When the Stock starts trading, most of the lucky (Big Money) are the ones selling on the open market to us little investors.

What’s more, historically, IPO’s typically rise 10-15% on average, the internet Bubble days of increasing 100-1000% on the opening days are gone (for now).  Even more is the historical fact that IPO’s after opening day average only 5% annually. Compared to non-IPO’s of similar sizes averaging 12%.  

Of all the IPO’s that get issued each and every year (some years have more, some years have less) there are very few that are outstanding.  The ones that are outstanding are going to get gobbled up by the institutions.  Moral of the story is if you can get all the shares you want, you probably don’t want them.

Historical Fact: 80% of all new leaders over the past 30 years were IPO’s or companies that issued new shares in their prior 8 years proving that real leaders come from entrepreneurial companies.

IPO’s have no trading history so it's impossible to tell if they are undervalued or overpriced.  This doesn’t mean you shouldn’t invest in them though but you should wait until the stock appreciates and then has its first correction.  When the stock pauses and builds its first base, that is the time to buy (as long as it has the proper fundamentals).  Wait till it breaks out of its first base.  This usually happens after its first few months of trading.

Most of the recent winners in the last few decades have been stocks that had their Initial Public Offering within their last 8 years.

Pro Tip:  Young companies (recent IPO’s) tend to be more volatile than other stocks, especially during corrections and definitely during Bear Markets.

Here's another example, Netscape had one of the most successful opening days for an IPO.  In August of 1995, Netscape opened the day trading at $71 a share, good for a 154% increase before closing at $58/share.  If you were one of the lucky ones, good for you, however, the small investors never had a chance to get in on the ground floor.  Patience my friend, patience.  Netscape, as many other IPO’s, would give us another chance.  Over the following two months after the IPO day, Netscape would consolidate and build a proper base.  In October, Netscape would breakout at about $60/share and skyrocket to $174/share in ONLY two months. 

Today's Takeaway:

Do not be in such a hurry to buy an IPO, wait for it to build a proper base and actually prove itself.  If it doesn’t, you didn’t get suckered in.

 

Until next time, Be the smartest Investor in the room.

Welcome to the Nerdery,

Chad