Finding the True Winners in the IPO Market

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I'm sure everyone has read at least one story about an investor who made a fortune buying some now-famous company on the day it originally started trading on the open market.

In some cases, the key to that fortune was buying a relatively obscure company that no one had heard of and then waiting for it to become the next Apple.

All too often, though, the mainstream financial media overlooks these unknown companies in favor of focusing on "marquee" listings like Facebook, Twitter, and LinkedIn.

Social media companies, for example, are somewhat akin to the IPO flavor of the month.

I'm not saying Facebook, Twitter, and LinkedIn are necessarily bad investments, but marquee stocks are typically overpriced.

They also have far less upside than small, less-covered companies…

Media Coverage Will Bury Your Returns

Unless you are a prized client of the underwriting bank, you're going to be picking up shares in the secondary market. Even if you stage your order before the open and it fills just seconds after the opening bell rings… it's still the secondary market.

That means you could end up paying 20%, 30%, 50% or more above the offering price because your order was queued alongside of everyone else who drank the pre-IPO Kool-Aid.

To use the infamous new car analogy, you can be $1,000s in the red the minute you drive it off the lot.

It's simple supply and demand.

If there are far more buyers than sellers, the price will automatically trade at a premium to the offering price, regardless of the stock's fundamentals. And in the case of IPOs trading in the secondary market on the opening day, that premium can amount to 100% or more.

Don't be suckered into over-paying for a newly listed company just because every commentator on television is hyping the living daylights out of it.

Remember, they're in the business of ratings (not information) so their over-coverage of an IPO is driven solely by popularity of the topic.

Two noteworthy examples in 2013, Twitter Inc. (NYSE: TWTR) and Container Store Group Inc. (NYSE: TCS) came out of the gate strong, gaining 65.03% and 34.48% respectively in the secondary market in just 2 short months. But since their recent highs, TWTR has lost -43% and TCS has shed -28.75%.

So much for making a fortune…

When to Buy Into the True IPO "Rockets"

Those are just two names but I chose them because they're probably still fresh in people's memories.

On the other hand, I'll bet most people had never heard of two very different examples: Qiwi PLC (Nasdaq: QIWI) or, until our recent Money Morning coverage, GW Pharmaceuticals PLC-ADR (Nasdaq: GWPH), and that's too bad… or maybe not.

The stocks both started trading in May 2013, experienced a period of sideways trading, and then exploded 231.6% and 678% respectively in approximately seven months.

My point is, if you want to make serious money on newly listed companies, you're much better steering clear of the hottest stocks on CNBC's radar.

Instead, shift your focus to lesser-known choices with much lower market caps and much higher upside. Even then, wait for the stock to form a base or even experience a pullback to establish a position – preferably "after" the lock-up period expires.

In case you're not familiar with the lock-up period, it is a caveat to the IPO filing that forbids insiders or majority shareholders from selling their stock for a predetermined time after the stock goes public. Lock-up periods can differ, but they're typically between 90 and 180 days.

Most companies only offer a small amount of their outstanding shares to the public during an IPO, so the lock-up period is designed to limit the amount of shares from hitting the market all at once. This keeps insiders from cashing out for an instant profit.

Instead of piling in on the opening day, be patient, and wait to potentially scoop up shares at a discount after a pullback associated with insiders selling shares to book a profit.

The obvious question is "How do I find out when IPO lock-ups are ending… especially if they're off the radar?"

It's actually not hard to find that information at all. I did a quick search for: "IPO lock-up expiration dates" and came up with a lot of links, and here's the best one I found: EDGAR pro by EDGAR online.

Based on the information provided here, there are 30 companies that will come out of their respective lock-up periods in April 2014 alone.

Many with names that you'll have never heard of… which sounds like just the right place to start.

Join the conversation. Click here to jump to comments…

About the Author

Sid is the investment community's best-kept secret. Since 2009, he has served behind the scenes at Money Map Press as Director of Research, analyzing hundreds of securities and profit opportunities for subscribers. He's an expert in the identification of specific market catalysts with "alpha" potential in a wide variety of industries, but especially the small-cap sector. From his years of research and training, Sid has an extreme attention to detail and a passion for identifying unique opportunities the market doesn't yet understand. He brings those recommendations to members of his Small-Cap Rocket Alert.

Sid is also an accomplished drummer and music producer. He lives in Denver.

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