How to Profit from the Biggest IPO Ever

If you couldn't get a piece of the largest IPO in history a couple of weeks ago, you were far from alone.

I think the Alibaba Group Holding Ltd. (NYSE: BABA) initial public offering will go down as the greatest wealth opportunity of a generation - but only about 4% of the $25 billion worth of stock went to individual investors like you.

As alluring as Alibaba and the white-hot IPO market can be, it's not a place to play unless you have the "connections" needed to access the best deals - or have a special "angle" to play.

How to Profit: AlibabaI can't help you with the connections. But I can give you that special angle.

And that angle will give you access to the profits rolling out of Alibaba and the IPO market - but at a much lower level of risk.

So today I'm going to show you a far better way to gain access to Alibaba's huge profit stream at a nearly 50% discount from the stock's current price - and at a much lower level of risk.

And I think you'll beat the overall market by some 80% over the next two years...

The Lifeblood of Silicon Valley

As a tech insider and someone who's watched and profited from IPOs for years, I know that Silicon Valley runs on IPOs. The promise of buckets of IPO cash is why venture capitalists back promising tech companies in the first place.

Not only that, but a healthy IPO market is good for stocks in general.

Bull markets like the one we're in run on fresh cash flowing in. And there's nothing quite like an IPO to keep investors buying stocks.

The good news here is the IPO market right now is the healthiest it's been in years.

According to Dealogic, the Alibaba IPO brought the value of deals so far this year to $69 billion. That's up 11.2% from the same period last year and puts it on pace to be the best year for IPOs in a decade.

In other words, Alibaba had a successful IPO in a great climate for new issues - and all that bodes well for the market as a whole.

But for retail investors, Alibaba represented three negatives.

First, it was hard to obtain shares. Second, retail buyers paid a premium to the offering price. Third, Alibaba's stock has been a mediocre performer since its launch.

Here's how the math works out. Alibaba had a high of $99.70 on its opening day, Sept. 19. A retail investor who bought at the high market price that day closed the session down about 7%.

And in the first week of trading, Alibaba remained below its $92.70 opening price, at one point off as much as 14.2% from its first-day high.

Now you know why I'm telling individual investors to stay away from Alibaba in its first six months of trading - and to follow that advice for most IPOs.

Just look at one highly hyped IPO from earlier this year. Since going public on March 26, shares of King Digital Entertainment Plc. (NYSE: KING) are down nearly 33%.

In cases like that, you get stopped out before the young stock stabilizes and begins its big move up.

How to Profit from the IPO Market in Just One Play

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That's why I believe every investor should own the First Trust IPOX-100 Index Fund (NYSE Arca: FPX). This exchange-traded fund (ETF) gives you the great long-term upside from IPOs without all that short-term volatility.

Moreover, the IPOX-100's managed to grab a piece of Alibaba, which now ranks as the fund's eighth-largest holding, representing 2.8% of the total. So, by investing in FPX, you'll get a slice of the Chinese e-commerce giant's upside.

And the IPOX-100 is a great a "twofer." As a fund that owns about 100 stocks covering the broad market, you get a combination of hot new tech stocks and diversification.

Of its top 20 holdings, 40% relate to tech or tech-centric healthcare. And the IPOX-100 also holds positions in finance, auto, retail, heavy industry, energy, and a smattering of metals and materials.

The ETF doesn't chase sexy small- and micro-cap firms. Instead, it is weighted toward mid-caps, with an average market valuation of $3.3 billion.

This is why this ETF represents such a net worth-boosting opportunity.

Its holdings are small enough to offer solid upside, but large enough to avoid the high volatility of more thinly traded stocks.

Consider that two of the IPOX-100's largest holdings have greatly outperformed the Standard & Poor's 500 Index over the past year.

Tesla Motors Inc. (Nasdaq: TSLA), whose stock debuted in July 2010, returned roughly 27% to investors over the past year. That's 50% better than the overall market. Accounting for about 2.2% of FPX, Tesla is the fund's 11th-largest holding.

And Facebook Inc. (Nasdaq: FB) is the ETF's top holding, making up more than 10% of the fund. Facebook had a disastrous IPO in May 2012, but it's up 57% in the past year, roughly three times the return of the S&P 500.

Another aspect I really like about this fund is how it balances its big caps with smaller firms that touch a wide range of high tech and the biosciences. Take a look at the following three FPX holdings:

  • FleetCor Technologies Inc. (NYSE: FLT), which launched its IPO in December 2010, is a leader in fleet management, digital-payments processing, and virtual cards for the energy and logistics industries. Over the past year, it's beaten the overall market's return by roughly 50%, although it's had a couple of pullbacks along the way.
  • NXP Semiconductors NV (Nasdaq: NXPI), one of the top 20 semiconductor companies in the world, places its chips in a wide range of tech sectors, from mobile to wearables. Its stock debuted in August 2010. Over the past year, the stock has gained roughly 91% - but it's more than twice as volatile as the market itself.
  • Pandora Media Inc. (NYSE: P) is a global leader in streaming music online and allows users to create their own Internet radio stations. Pandora shows one of the hazards of buying into a single IPO. It's more than doubled in the past two years and is at about break even for the past year - but it lost 54% of its value in the first 18 months after its June 2011 debut.

Now trading at around $48.50, the IPOX-100 is the single best way for most investors to cash in on the burgeoning IPO market. It costs nearly half of Alibaba's opening share price and offers a far broader play.

Over the past two years, the IPOX-100 has returned 67% to investors, beating the S&P 500's profits during the period by 80%. There's no reason it can't do so for the next two years, given how active the IPO market has become.

With FPX, you'll experience the excitement of participating in brand-new stocks that beat the overall market but without all that risk and volatility.

As such, this is a unique investment that provides a foundational play, a focus on strategic growth, and a foothold into Alibaba - maybe the biggest wealth opportunity of this generation.

Years from now, you'll be glad you cashed in and were able to watch the IPOX-100 steadily increase your wealth.

More from Michael Robinson: Wearable tech is expected to grow 78.4% through the end of 2018. If we want to get on the road to wealth that tech provides, then this is a sector we must cash in on. Here's how to invest in wearable tech with just one power play...

About the Author

Michael A. Robinson is a 36-year Silicon Valley veteran and one of the top tech and biotech financial analysts working today. That's because, as a consultant, senior adviser, and board member for Silicon Valley venture capital firms, Michael enjoys privileged access to pioneering CEOs, scientists, and high-profile players. And he brings this entire world of Silicon Valley "insiders" right to you...

  • He was one of five people involved in early meetings for the $160 billion "cloud" computing phenomenon.
  • He was there as Lee Iacocca and Roger Smith, the CEOs of Chrysler and GM, led the robotics revolution that saved the U.S. automotive industry.
  • As cyber-security was becoming a focus of national security, Michael was with Dave DeWalt, the CEO of McAfee, right before Intel acquired his company for $7.8 billion.

This all means the entire world is constantly seeking Michael's insight.

In addition to being a regular guest and panelist on CNBC and Fox Business, he is also a Pulitzer Prize-nominated writer and reporter. His first book Overdrawn: The Bailout of American Savings warned people about the coming financial collapse - years before the word "bailout" became a household word.

Silicon Valley defense publications vie for his analysis. He's worked for Defense Media Network and Signal Magazine, as well as The New York Times, American Enterprise, and The Wall Street Journal.

And even with decades of experience, Michael believes there has never been a moment in time quite like this.

Right now, medical breakthroughs that once took years to develop are moving at a record speed. And that means we are going to see highly lucrative biotech investment opportunities come in fast and furious.

To help you navigate the historic opportunity in biotech, Michael launched the Bio-Tech Profit Alliance.

His other publications include: Strategic Tech Investor, The Nova-X Report, Bio-Technology Profit Alliance and Nexus-9 Network.

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