How to Play The Sizzling IPO Market (Without Getting Burned)
Many investors join an initial public offering’s exuberant party, only to get a painful “morning after” hangover. To be sure, the IPO market right now is hotter than it’s been in years, but it’s difficult to separate the hype from genuine opportunity. Make the wrong bet and you could quickly lose your shirt.
Below, I pinpoint a safer and easier way to profit from the IPO bonanza, which shows no signs of letting up.
In terms of IPOs, 2016 was a dreadfully slow year — indeed, the slowest since the Great Recession. The influx of money into private start-ups largely stole the IPO market’s thunder.
But in the first half of 2017, the IPO market gathered considerable momentum that seems sustainable for the rest of the year. In the second quarter of 2017 alone, 52 companies completed their IPOs to raise a cumulative total of almost $11 billion.
The robust pace of public offerings in the second quarter represents the most active quarter in two years and significantly exceeds the 25 IPOs in the first quarter, as well as the 34 IPOs in the second quarter a year ago.
The prospectus detective…
Pictured to your left is Linda McDonough, chief investment strategist of Profit Catalyst Alert. Linda says the accelerating activity of the IPO market provides what she calls a “treasure trove of plays,” both long and short.
Linda has more than 30 years of hedge fund experience, so she knows how to separate the investment wheat from the chaff. As she explains:
“Researching stocks takes me in different directions, and I find some of the most relevant data on industry trends in the prospectuses filed by companies hoping to go public.
With the market for initial public offerings perking up, I’ll be sharing a lot more of that IPO research and analysis with you.”
The surge in IPOs reflects investors’ increasing willingness to shoulder risk, as they scour the overvalued equity landscape for new sources of growth. In the second quarter, the deals included a more diverse range of industries than usual. Health care companies racked up 14 deals worth $1 billion, followed by technology companies with 12 deals worth $1.6 billion, and financial services with eight deals valued at $900 million.
Fueling the spate of IPOs is the bull stock market and strengthening economic indicators, as well as the craving of investors for new places to put their money. It also helps that most of the firms that went public in the first quarter of 2017 have outperformed the S&P 500.
However, not all IPOs are created equal and it’s easy to get burned. Sometimes the most anticipated stock market debuts end up being a waste of time and money, as cold hard reality kicks in and investors get buyer’s remorse.
Consider Snap (NYSE: SNAP), a social media company whose product Snapchat is an image messaging and multimedia mobile application.
Younger folks apparently love the Snapchat service, which lets them do things such as superimpose silly mustaches over their photos. I don’t understand why Snapchat is such a big deal, but then again, I’m a curmudgeonly investment analyst who was born in the Eisenhower era.
On March 2, Snap was the largest tech IPO in more than three years and closed out its first day of trading with a valuation of $28.3 billion. Since the IPO, Snap’s market cap has dropped to about $18 billion and shares have plunged nearly 40%, in the wake of weak quarterly operating results and growing doubts that management can properly monetize the Snapchat app.
Wall Street is littered with the bleached bones of former IPO high-fliers; stocks in the Internet sector are particularly fragile. Clearly, the Snapchat generation is too young to remember the dot-com crisis of 1997-2001.
On Tuesday, analysts at Morgan Stanley (NYSE: MS) downgraded Snap, a day after shares of the Snapchat parent plunged beneath the IPO price of $17. The investment bank dropped its price target for the stock from $28 to $16, which is a cruel irony, because it was underwriter Morgan Stanley that took the company public and priced it at $17 a share.
In my March 7 issue, I warned readers to give Snap a wide berth. As I wrote at the time: “I advise you to avoid Snap; it’s a risky and unproven company.”
Online meal-kit purveyor Blue Apron (NYSE: APRN) is another cautionary tale. The company’s highly anticipated IPO in late June was lackluster because it came amid the news of Amazon’s (NSDQ: AMZN) intended merger with upscale grocer Whole Foods Market (NSDQ: WFM).
Investors are rightfully concerned that Blue Apron would face fierce competition from a combined Amazon/Whole Foods entity. Blue Apron shares have been wildly volatile in recent days, a reminder that the IPO game can be dangerous.
Riding the IPO rocket…
If you want to ride the IPO rocket but fear a single disastrous launch could blow up your portfolio, consider the Renaissance IPO ETF (NYSE: IPO).
By tracking the Renaissance IPO Index, this exchange-traded fund provides broad exposure to the largest and most liquid newly public companies.
The Renaissance IPO ETF is well diversified, holding 45 stocks in its portfolio with each representing less than 10% of total assets. Technology (23.3%), industrials (17%), consumer cyclical (15.6%), and consumer defensive (12.3%) are the top four sectors.
With net assets of $13.7 million, Renaissance sports a reasonable expense ratio of 0.60%. The fund’s performance figures are impressive, with returns of 21.7% year to date, 8.72% over the past three months, and 31% over the past year.
If you have any questions or comments, please shoot me an email: email@example.com. I’d particularly like to hear how you’ve fared with one of my recommendations. Share your story. I publish and answer select reader letters in every Monday issue. — John Persinos
Big profits lie beneath your feet…
I’ve just made clear that today’s IPO market is hot. Here’s another hot investment (both literally and figuratively): sand.
Think about America’s best beaches. Oceanfront properties, such as President Trump’s luxury resort Mar-a-Lago, are constantly battling the encroachment of the tides. It’s an ecological problem that only gets worse as sea levels rise and storms increase in frequency and intensity. Demand for sand grows particularly acute in summer, when millions flock to the shore.
That means certain providers of sand are positioned to make outsized gains, yet few investors know about this opportunity.
You can profit from the sand boom, today. Click here for all the details.