Yes, there's been a low volume of 2016 IPOs due to broader market volatility.
While the Dow Jones Industrial Average fell 4.5% during January and February, only four companies went public. That was down from 24 over the same period in 2015. So far, the eight IPOs this quarter marks the lowest level of activity since the depths of the financial crisis in Q1 2009.
But 2016 IPOs are about to stage a huge turnaround. That's because historical data shows strong IPO returns, and market outperformance always follow periods of low issuance.
"While the ultimate pace of the 2016 IPO market remains tough to call at this point, even in a low-issuance environment we expect a number of important IPOs to launch," Renaissance Capital, a manager of IPO-focused ETFs, wrote in a report on March 28, "which, if past IPO cycles are any guide, should deliver attractive returns to IPO investors."
And we found one way for you to profit from this outstanding IPO performance in 2016.
First, let's look at the signs indicating the 2016 IPO market is ready to bounce back…
This Chart Shows Why 2016 IPOs Will Make a Huge Comeback
The IPO market historically outperforms the broader market in the months following a period of inactivity.
In the above chart, you can see every IPO shutdown – or period of little to no IPO pricings – from the financial crisis to the present that lasted more than 31 days. Companies that went public during the first three months after an IPO shutdown saw an average 90-day return of 31% — beating the S&P 500's average 5.6% return. The most significant period was Feb. 10, 2009, to May 10, 2009, when all four companies that went public smashed the S&P 500 by a whopping 56%.
"That's a staggering differential," Money Morning Executive Editor Bill Patalon told Private Briefing readers on March 11. "Indeed, it's the kind of outperformance that – over a much more extended stretch – fortunes are built on."
But as the upcoming 2016 IPO calendar starts to gain momentum, investors want to know what types of "icebreakers" – the strong and well-positioned companies that will revive the post-shutdown IPO market – we can expect to see in the coming months.
Here are two 2016 IPOs that will revive the IPO market in the second quarter – as well as the best way to profit from the IPO market's momentum…
The Best Way to Make Money from These Two IPO Icebreakers
According to Renaissance Capital, there are two high-growth companies that will be responsible for ramping up IPO activity in Q2…
Icebreaking 2016 IPOs No. 1: SoulCycle Inc. (NYSE: SLCY) is a chain of indoor cycling facilities with 58 locations nationwide. It's being spun off by luxury gym chain Equinox, which has a 97% stake in the New York-based fitness company. SoulCycle's popularity and dominance in a growing market for boutique fitness classes has translated into huge growth. Revenue increased from $75.3 million in 2013 to $112 million in 2014, and profit came in at $8 million during the first quarter of 2015. The company filed with the U.S. Securities and Exchange Commission (SEC) to raise $100 million. No specific IPO date has been set, but it's expected to hit the market in the second quarter.
Icebreaking 2016 IPOs No. 2: BATS Global Markets Inc. is an operator of stock exchanges in both the United States and Europe. As of March 30, the company's two U.S. exchanges – the BZX Exchange and BYX Exchange – make up 11% of all domestic trading volume. BATS' attempt to go public in 2012 failed after the company's software experienced a fatal glitch that led the firm to cancel the offering. Its cash flow has grown significantly since then, with total 2015 profit surging 67% to $82.2 million from the year before. The company's $2 billion valuation will make it one of the most valuable IPOs of the year. BATS filed for a $100 million deal, but the firm is expected to raise upwards of $300 million. The firm will hit the market sometime in Q2.
While these IPOs might sound attractive, we've found an even better way to profit from IPOs than by buying into these stocks directly.
You see, these new deals can rip off investors like you and me because Wall Street reserves early shares of these popular IPOs for hedge funds willing to buy thousands of shares at a time. When shares begin trading, the stock price skyrockets and lures retail investors into thinking they can profit from the explosive gains.
But by the time we buy in, these "VIPs" usually sell the stock off. This causes the stock price to fall and causes investors like us, who bought in at the inflated price, to suffer huge losses.
"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," explained Money Morning Defense & Tech Specialist Michael A. Robinson – a leading tech financial analyst with decades of trading experience – back in 2013. "You don't want to become the person who buys at the top."
That's why he recommends the First Trust IPOX-100 Index Fund ETF (NYSE Arca: FPX) in order to get a piece of the exciting IPO action. The exchange-traded fund is up 6.4% over the last month and only invests in newly issued mid-cap firms with an average $3.3 billion valuation.
In other words, these companies are small enough to offer solid upside, but big enough to avoid the huge volatility of cheaper 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," Robinson said. "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."
Alex McGuire is an associate editor for Money Morning who writes about 2016 IPOs. Follow him on Twitter for the biggest IPO calendar updates.
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The 5 Most Important IPOs to Watch This Year… As the IPO market picks back up, a number of massive deals will come down the pipeline and offer huge returns for savvy investors. That's why we've gathered a list of the five most important IPOs to watch in 2016…