Money Morning Chief Investment Strategist Keith Fitz-Gerald told readers when Snap Inc. (NYSE: SNAP) went public that it was the "worst IPO [he's] ever seen."
While the ability to buy into a "hot IPO" this week at a seemingly bargain price may look like a good deal, we think investors should still avoid the stock at all costs.
Snapchat stock was doomed from its birth as a public company. Since SNAP stock debuted on March 2, it has faced increasing competition from Facebook Inc. (Nasdaq: FB), a $2 billion-plus loss in its first earnings report, and a sliding stock price.
And this week, Snap stock faces yet another challenge as its "lock-up period" is expiring.
When a company issues shares to the public, employees and other insiders are initially prohibited from selling their shares. This theoretically adds a bit of stability to the young stock as it prevents wholesale dumping of shares at the outset.
But all that changed this week as insiders are getting their first chance to sell.
Snap's lock-up expiration totals about six times its IPO float. Think about what that means. Right now, there is a potential supply of shares that can hit the market that dwarfs what is already out there. The current turnover in the stock cannot possibly absorb it all without a huge decline in price as the market tries to restore equilibrium.
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Let's put some numbers on this.
Some estimates forecast that 957 million shares of Snapchat stock could hit the market as insiders sell. Compare that to the average daily trading of 18 million shares. It would take 53 days to work all of that supply into regular stock trading. That's more than 10 trading weeks! In the last 10 weeks alone Snap stock lost 38% of its already depressed value. That is not a trend you want to ride.
And that's not the only problem for Snapchat stock in 2017...
Problems Are Only Mounting for Snapchat Stock in 2017
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As if the company has not had enough problems, Snap is in the center of a new controversy stemming from the lack of voting rights given to shareholders.
The company made headlines earlier this year as it went public. It sold upward of 200 million shares at $17 each but did not give those investors any votes along with the shares. Instead, the company's two co-founders, Evan Spiegel and Robert Murphy, have 88.6% of the voting power.
Now, both Standard & Poor's and FTSE Russell are excluding it from membership in their indexes for this very reason.
This is important, especially for a newly minted public company, because exclusion from the indexes means institutions and funds that track those indexes have no need to buy them. It removes a huge source of demand for shares as well as for coverage by Wall Street analysts.
Snap Inc. is expected to report earnings for its fiscal quarter ending June 2017 on Aug. 10, after the market closes. According to Zacks Investment Research, based on nine analysts' forecasts, the consensus earnings per share forecast for the quarter is $-0.29. Another loss. And Fitz-Gerald says, "It will lose gobs more money in the months ahead."
That's not exactly the kind of company you want in your portfolio.
This Stock Is Beating the Markets 16 to 1 - and It's Just Getting Started
Investing should be profitable. But the average market index fund may hit 8% a year... if it's lucky.
A 401(k) or IRA may do 7%... if you've got good management. The average hedge fund... well, they've been clobbered lately.
Meanwhile, one of Keith Fitz-Gerald's recent picks in his Money Map Report is beating the markets 16 to 1. It's up more than 22% since June 20.
It's just the latest winner from Keith, who regularly finds stocks set to rise on high-profit trends.
You can find out how to get that and all Keith's Money Map Report recommendations here.