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Dear Red Alert Reader,
Not long ago, the best shares of the market's hottest initial public offerings were reserved for elite investors, but with the advent of entities like special purpose acquisition companies (SPACs) and methods like direct listings, which we saw last week with Coinbase Global Inc. (NASDAQ: COIN), that's changed.
The landscape has changed so radically, with a near-constant flow of high-profile IPOs, that the central question – "What IPOs should I invest in?" – has flipped upside down.
In 2021, the more important question is: "What IPOs shouldn't I invest in?"
DoorDash Inc. (NASDAQ: DASH) is the perfect example of an instance where eager investors should've thought twice…
On Dec. 9, 2020, it raised $3.4 billion, trading at a 9.5% premium to its opening price.
Then the roller coaster ride started… a three-week 26% drop, followed by a nine-day 43.5% rise, with investors chasing the stock all the while. By March 2020, DASH shares had fallen 39.5%; retail investors who managed to get the stock at IPO notched a particularly bruising 20% loss.
The thing is, a recovering economy and the constant growth of the tech sector mean 2021 is going to be another record-breaking year for new stocks.
In 2020, there were 480 total IPOs, but barely five months into 2021, we've already seen 429 hit public markets – that's nearly 10 times more than we saw over the same stretch of 2020.
To be blunt, plenty of these IPOs won't be worth it; their shares could ultimately trade for pennies.
But it's also true that the next Amazon or Microsoft is out there, and may be listing this year – and I know an easy way to make sure you own it…
Leave the IPO "Minefield" Behind
I've had thousands of interactions with investors from all over the spectrum – young and old, folks just getting into the markets, old pros, with modest capital and vast piles of it. The IPO strategy I share with them, and indeed with you all, has always been simple: wait.
Most investors are sorely tempted to scramble for IPOs, given the ever-increasing amount of buzz and hype surrounding them.
But I've always said it's best for tech investors to avoid buying IPOs at the open, given the tendency of Wall Street and early investors to cash out at that point.
In fact, I almost always recommend investors wait at least six months before moving into newly listed shares. That's when the six-month "lockup" period ends and employees who received stock as compensation are free to sell – or keep – their shares. If the insiders sell in appreciable amounts, it's probably best to give the stock a miss, at least until the smoke clears. When that lockup period ends, you'll have a much better picture of a company's intermediate- and long-term performance prospects.
See How to 20X Your Digital Wallet in 2021
At the beginning of the year, Michael Robinson introduced a group of readers to one of the largest market events of the 21st century – the Digital Gold Rush. Now, just three months later, his three picks have soared 800%+. The best part is, each piece of his 3-part crypto lineup is still trading for under $10 – and they’re perfectly positioned for a 2,000%+ run by year-end.
And on a stock by stock basis, that's still the way to go. Given the increasing importance of cryptocurrencies, for instance, I'll be watching Coinbase closely for the entire six months.
But nowadays, my recommendation is even simpler – I tell folks to buy just one exchange-traded fund (ETF) to lock in the profits only the best IPOs can offer.
How to Ensure You Own the Best of the Best IPOs
I'm talking about the First Trust Equity Opportunities ETF (NYSEArca: FPX).
FPX is not, strictly speaking, a tech-specific ETF; its entire reason for being is to capture the broadest selection of the best newly minted stocks.
That said, it is most definitely a tech-heavy ETF. In a reflection of the huge role tech and innovation play in the United States' economy, it's no surprise that communications, healthcare, and information technology (IT) make up nearly 60% of the fund's basket of holdings. It also gets you exposure to the automotive sector, retail, heavy industry, and energy – sectors that, given the U.S. economy, are often tech "adjacent" these days.
One thing you won't find in this fund is the "next DoorDash." Fund managers have a keen eye for picking the best new stocks. No matter what the Wall Street hype machine says, if an IPO doesn't meet its stringent criteria, it's passed over. Management is looking at the fundamentals. Companies FPX holds must have a market cap of at least $1.6 billion, though the average equity holding weighs in at $12.5 billion.
Here are just a few of the standouts in an all-star basket…
The Trade Desk Inc. (NASDAQ: TTD) offers a broad and growing roster of ad management tools that is creating a massive wave of ad industry disruption. The firm's clients can buy ads from more than 70 different exchanges and networks. We're talking roughly 580 billion ad impressions and roughly 450 million devices per day across the globe. The firm can display key data analytics in clear and easy-to-understand graphics.
Snap Inc. (NYSE: SNAP) is the parent company of Snapchat. It offers a mobile app for Android and Apple Inc.'s (NASDAQ: AAPL) iOS devices used by young people all around the globe. The firm operates a very sticky mobile-social platform. With 229 million daily users on average, the app reaches more 13- to 24-year-olds than Facebook or Instagram in the United States, UK, France, Canada, and Australia.
Etsy Inc. (NASDAQ: ETSY) is the leader in a highly profitable e-commerce niche for arts, crafts, and handmade goods. Founded in Brooklyn in 2005, Etsy is built around the notion that the item you're buying is unique. The firm also offers an augmented reality tool for its mobile app that lets you see what a piece of art will look like on your wall before you buy it.
Keysight Technologies Inc. (NYSE: KEYS) is helping clients prepare for the coming wireless service industry upgrade to 5G. This is a backend play on the entire sector because Keysight provides testing services for the wireless sector, among other industries. Its 32,000 customers include all top 10 telecom equipment companies, all but one of the top 25 semiconductor makers, and all but one of the 25 top telecom operators.
Depending on your time frame, FPX usually beats the S&P 500 – easily. Since the "COVID Crash" last March 23, FPX has turned in 144% gains, not quite one and a half times the performance of the S&P 500.
In fact, over the past five years, FPX has done nearly 46% better than the big index.
The bottom line is that IPOs come and go – increasingly, they'll be coming more often. Owning FPX in your long-term holdings is a way to ensure you get the very best of that growth and sidestep all the hassles.
Of course, even the best IPOs would have a hard time matching the performance of cryptocurrencies this year, to say nothing of its future potential. But, here again, folks could possibly do better staying "under the radar" with their crypto portfolios. Some small cryptos can be much more affordable than Bitcoin, but could conceivably deliver a 638% profit by the end of 2021. Right now, I'm looking at three small coins in particular – here's how to get my take on all three.