Investment bankers love to brag about successful initial public offerings - like the one earlier this year from Spark Therapeutics Inc. (Nasdaq: ONCE).
That's because IPOs can be a great source of wealth. Since Spark, a gene therapy biotech firm, began trading Jan. 30, the stock is up roughly 100% from its offering price of $23.
But here's a little secret that Wall Street doesn't like to talk about - most retail investors can't get anywhere near hot IPOs like Spark's.
The vast majority of these initial shares are allocated to mutual funds, hedge funds, pension funds, insurance companies, and high-net-worth individuals. That means retail investors like you have to pay a premium for the stock after it's already begun trading, seriously cutting into your profits.
So today, I'm going to show you a way to side step Wall Street and play the IPO boom...
IPOs: I'm a Believer
Don't get me wrong. I'm a big believer in IPOs.
IPOs are one of the main reasons why Silicon Valley can bring us a steady stream of innovations. Initial offerings give entrepreneurs the opportunity to go from early-stage startups to publicly traded firms in just a few years.
And you'd be hard pressed to find a better IPO environment than we have right now.
Some 275 companies went public in the United States in 2014, the highest number in 14 years, according to market trackers Renaissance Capital. The total value of 2014 U.S. IPOs was $85 billion, a 55% increase from 2013.
High-tech and life-sciences firms played a big role there. Together, they accounted for 57% of new issues.
While it may not eclipse 2014′s boom, this year is already shaping up to be another big one. Roughly 200 firms are on track to issue stock this year.
And that will create a lot of wealth.
Here's how to get in on it...
The Secret Way to Profit from the IPO Boom
Now is a great time for tech investors to take a good look at the First Trust IPOX-100 Index Fund (NYSE: FPX), which tracks the market for IPOs and has long been one of my favorite exchange-traded funds (ETFs).
And I think every tech investor ought to consider holding it for the long haul. By doing so, you can grab the upside and excitement that IPOs offer without all the volatility inherent in new issues.
In other words, let FPX's fund managers do all the heavy lifting while you sit back and watch the profits pile up.
Now, FPX doesn't specialize in new tech stocks. Instead, it seeks to mirror the broad market for IPOs.
And that's a good thing. FPX gives us a good combination of tech stocks and an entry into the broader market. That makes it a great "twofer" in which 40% of the top 20 holdings relate to tech or the life sciences.
FPX, which holds 100 stocks, also gives us access to finance, auto, retail, heavy industry, energy and a smattering of metals.
The fund's managers don't invest in every new IPO that comes along. Instead, these are focused and disciplined managers who seek to balance high returns with stable investments.
Indeed, FPX is weighted toward mid-caps, with a median market size of $5.6 billion. And the managers have been lucky enough to acquire stocks that cost just a little more than one times sales.
Over the past year, Facebook Inc. (Nasdaq: FB) has remained FPX's top holding, accounting for just under 10% of the fund.
I can see why. Facebook continues to ramp up sales across the board. In the most recent quarter, it reported 1.4 billion users (roughly the size of China's population). It also has 700 million users for its WhatsApp servers, 500 million Facebook Mobile users, and 300 million people on Instagram.
But FPX has several other very impressive entries. Let's take a look at four of them:
- Alibaba Group Holding Ltd. (NYSE: BABA) is the leading Chinese e-commerce conglomerate, owning multiple Web-based companies. They cover everything from online consumer marketplaces to advertising exchanges for business. Alibaba also is a major provider of cloud computing services for Chinese companies. Here in the United States, it's best known for its record-setting $25 billion IPO last September. With a market cap of $213 billion, it has 37% operating margins.
- Delphi Automotive Plc. (NYSE: DLPH) is a play on the booming new-car market and a great investment in the tech-centric "connected car." Among other things, Delphi develops and manufactures such safety features as adaptive cruise control, lane-departure warning systems and front and rear cameras integrated with collision-avoidance radar.
- Splunk Inc. (Nasdaq: SPLK) is focused on Big Data. Specifically, it analyzes "machine"-generated data. That's a loose term that covers the Web, computer servers, networks, mobile devices and the billions of sensors in use around the world. With a nearly $7.5 billion market cap, the company has weak profit margins but averaged a 57% annual sales growth rate over the last three years.
- NXP Semiconductors NV (Nasdaq: NXPI) is one of the top 20 companies in the world for sales of semiconductors. It's a standout firm in several key tech areas, covering everything from mobile payments to wearable tech to chip-based smart credit cards. With a $21.4 billion market cap, NXPI has a return on stockholders' equity of nearly 52% and 20% operating margins.
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Now trading at around $52, FPX is priced cheaper than many of its portfolio holdings.
That's why I think this is the single most cost-effective way for the average investors to cash in on the IPO boom.
Over the past two years, FPX has returned 51% to investors, beating the Standard & Poor's 500 Index's profits during the period by more than 40%. I see no reason it can't do the same for the next two years, given how active the IPO market has become.
FPX fits in two of our investment categories. It's clearly focused on companies that have a lot of growth ahead.
And at the same time, this is a sleep-easy investment - a solid tech foundational play that puts you on the road to wealth.
You may not have the secret "membership card" that gets you invited to the IPOs of Alibaba, Shake Shack Inc. (NYSE: SHAK) and Spark Therapeutics.
But you'll soon find FPX to be the next best thing.
2014 Was a Stellar Year for the U.S. Auto Industry: Automakers sold 16.5 million cars and reported their strongest U.S. sales since 2006. As this industry surges, so too will this sector of Silicon Valley. After all, the newest cars need the newest technology. Here's where the real capital of the auto industry lies...
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.