IPOs are back, big time. Even unsexy companies are sprouting sweet IPO gains
Take organic grocer Sprouts Farmers Market. It gained nearly 123% in its first day of trading Thursday - the best initial public offering (IPO) debut since LinkedIn Corp. (NYSE: LNKD) more than two years ago.
IPOs as diverse as Norwegian Cruise Line Holdings Ltd. (Nasdaq: NCLS) and fast-casual eatery chain Noodles & Co. (Nasdaq: NDLS) have soared. The market has locked and loaded on about $4 billion in U.S. IPOs so far this year, Bloomberg News reports.
At that pace, companies "going public" would raise the most this year since at least 1999, the financial news service says.
A new survey by global consulting firm PwC shows that IPOs soared in this year's second quarter. The April-to-June period saw 62 IPOs - an increase of 88% from the year-ago period.
Welcome to the white-hot IPO market.
There's only one problem ...
If you're not rich - you know, aren't one of those high-net-worth "accredited investors" (in essence, an insider or someone with a good buddy at an investment bank) - then you probably are watching from the sidelines.
In fact, you're most likely watching from the "nosebleed seats" - or about as far from the action as you can get.
And that stinks, says Michael Robinson, our resident tech guru and the editor of the Radical Technology Profits advisory service.
"I often refer to the IPO market as the 'rich-man's market'," Michael said to me during a conversation we had late last week. "And it's reprehensible that the gains are reserved for the rich."
Today we're going to turn the tables.
I have to confess ... in case you folks can't tell ... I really like the tech sector. Back during my business journalist days, I covered a number of high-tech firms, and spent a fair amount of time out in Silicon Valley - Michael's stomping grounds. I also covered the biotech sector - which is one reason you have reaped such nice gains from those types of stocks.
And because Michael and I share this interest in technology - not to mention similar career backgrounds - we've become quite simpatico and, I have to admit, have become real chatterboxes. In fact, rarely a day goes by where we don't talk at least once. And we fire more e-mails at each other than the British fired cannonballs on Fort McHenry back in 1814 (one of my favorite history stories of all time - but that's for another day).
Lately, I've been watching all these IPO deals and said so to Michael.
His response surprised me.
"You know, Bill, I have a set of rules that I apply to IPOs," he told me. "Even better, though, I have this killer - and I mean killer - way for retail investors to play the IPO boom. When I tell people about it, I often jokingly refer to it as 'my secret passageway to the rich-man's market'."
As soon as he said this, I was already planning on how I'd share it with you.
In fact, as you'll see, this is one of the coolest ideas we've had here for you in some time. Not many folks know about it.
Before we get into the actual recommendation, let's first talk about Michael's rules.
Michael is very much a "rules-based" guy ... investor.
Not that he isn't a free-thinker. But what he's discovered is that his rules make it easier for his readers/subscribers to grasp his thinking ... you know, a way to "package" his ideas into a kind of "bit-sized" portion for retail investors of all experience levels to understand.
That's why he's so doggone good.
The IPO market can be a real jungle, which means that IPO investing can be a daunting process.
"As I often tell people, because Wall Street tends to reserve the hottest issues for its 'best' customers - folks I often describe as the 'ultimate insiders' of the U.S. financial markets - IPO deals can be tough for retail investors to get into," Michael explained. "And even if you do manage to get a few shares, there are still difficult decisions to make - such as how long you should hold on, or under what circumstances you should sell."
As Michael says, to profit - and win - in the IPO market, you need a strategy.
Enter "Robinson's Rules for IPO Investing," which tell you to:
- Know the Market: This is a key fact you must commit to memory - that determining the "true value" of many high-tech IPOs is as much an art as it is a science. Many of these firms are on hyper-growth curves. But their current sales-and-profit outlooks can vary widely. If you know the market the companies are involved in - mobile-tech, cancer drugs, or software-as-a-service (SaaS), for instance - you can get a good sense of how the competition stacks up, and how IPOs of peer companies have done. This at least gives you a ballpark feel for what the IPO's "fair" price range should be.
- Put Facts Before Hype: The best IPOs are almost always accompanied by a lot of pre-deal hype. Too many investors hear of a "hot IPO" and try to get in on the action - without doing any homework at all. That's a recipe for a hefty loss. You need to do the basic research. Start by visiting the company's website to get an overview of the business. Look at management, recent customer wins, recent awards and news. You can also find information on financial websites about its key competitors and how they're doing. Check out solid news sources such as moneymorning.com, Bloomberg News and one or two other reputable news sites. This will give you a sense of how the stock will be priced, what the post-IPO demand looks like, and what the company's prospects look like going forward.
- Always Use a Limit Order: Unless you're an insider, or are a high-net-worth investor, it's going to be tough to actually get shares of the best IPO deals before they trade in the aftermarket - which is when any investor can buy them. Too many investors try to make up for that by purchasing the stock as soon as it begins to trade as a newly public venture. Even worse, some put in an order shortly before the stock begins trading in order to buy "at the market" after it does. But this approach exposes you to a massive risk and could leave you holding the bag. If the stock opens up 50% you will very likely pay that price. If the stock then fades by half and closes its first day of trading with a 25% gain, you'll have been killed - even as Wall Street celebrates the "wildly successful" IPO deal. That's why I tell investors to put in a "limit order" that's absolutely no more than 10% higher than the offering price. To me, that's a reasonable premium. More than that is asking for trouble.
- Never Chase an IPO: This is an important follow-on to Rules No. 2 and 3. Over the years, I've seen too many investors hear about a big pop for a new issue and then go chasing those gains. But remember, the pre-IPO "insiders" very often want to sell into the rally. You don't want to become the person who buys at the top. In the long run, you'll do much better letting that stock go and looking for another more viable play.
Having read all this, I'm betting many of you might want to avoid IPOs completely - either because you think the field is too risky or don't have the time to do your homework.
Don't make that mistake.
You see, we've found a great way for you to get a "piece of the action."
It's the First Trust IPOX-100 Index Fund (NYSE: FPX) an exchange-traded fund (ETF) focused on IPOs.
"Bill, I can almost hear your readers saying: 'Ugh, another ETF? After all that buildup?' But I'm telling you: This is a very special investment that not many folks seem to know about," Michael said. "Truth be told, it's actually a terrific way to profit from the hot IPO market we're seeing right now. First and foremost, you don't have to be an insider. You don't have to worry about emotions leading to bad decision-making - you know, all the contingencies I outline in my rules. And, best of all, the FPX is an absolute market-beater: It's already up 46% over the past year, roughly double the return of the Standard & Poor's 500 Index."
Strictly speaking, it doesn't focus exclusively on high tech. But that's okay: The fund seeks to mirror the broad market for new stocks across all sectors - and, as the Sprouts and Noodles IPO demonstrates, you don't need a tech IPO to make a lot of money.
In that regard, think of this as a "two-fer." You get hot new tech plays and broad diversification. The FPX ETF holds positions in finance, auto, retail, heavy industry, energy and a smattering of metals.
And because it trades at only $40 a share, it's cheap enough for even the typical retail investor to get a nice block.
"As you know, Bill, I'm a big fan of rules-based investing because it helps me define my strategy and creates a structured discipline, or methodology, which minimizes emotions and makes my readers more decisive," Michael said. "And that forced discipline is what I like most about this profit play - which is actually a much more complex financial instrument than most ETFs you'll find."
He's right. The managers of FPX describe the fund as being "rules-based." The fund only invests in a stock after doing a thorough review of the underlying company's financials. And it sells each stock after holding it for 1,000 days.
By definition it doesn't invest heavily in the sexiest small and micro-cap firms. Instead, it is weighted toward mid-caps with an average market value of roughly $3.3 billion.
These are firms still small enough to offer solid upside - but large enough to avoid the potentially stratospheric volatility of more thinly traded stocks.
"The bottom line here is that this is the simplest way I know of to get in on the white-hot market for IPOs," Michael told me. "It will save your subscribers a lot of time, energy and worry. And I believe it will make them a lot of money ... helping them build their net worth and work toward living a life of their dreams."
That last comment isn't some corny statement ... you know, "living your dreams." I know from your letters and e-mails to me that you folks work very, very hard and that life in today's America can be quite the challenge. Don't think we here at Money Morning don't worry about that all the time. Because we do.
You'd be surprised how many nights we're here late - and I mean late - as we examine ideas and investments in the never-ending search for ways for you to create meaningful wealth.
So when one of the recommendations we've made doubles, triples or quadruples - or becomes a takeover at a big premium - you write, call or e-mail to tell us about your personal gains, and we're thrilled for you.
And we get just as jazzed - and I mean jazzed - when one of our experts finds a profit play as unique and downright cool as the one Michael brought us today.
And this isn't all he brought us.
Michael - along with all our other gurus - contributed some of his best thinking to the new Private Briefing special research report: "Bernanke's Deal With the Devil: A Blueprint for Surviving the Coming Crash."
Take a look by clicking here.
Until then, may fortune follow and find you ...