You can make a lot of money in high-tech initial public offerings (IPOs).
And so have my readers - plenty of times.
But you must follow Your Tech Wealth Blueprint's second rule for grabbing massive tech profits - "separate the signals from the noise" - and avoid Wall Street's hype machine.
To see what I mean, let's put the recent IPO from the photo-centric social network and messaging service Snap Inc. (Nasdaq: SNAP) under our microscope.
When Snap began trading March 2, it was the most hyped tech IPO of the past few years. Investors were told they were crazy if they didn't get in on the action of a hot young firm with 161 million daily users and $405 million in 2016 sales.
You can bet that Morgan Stanley, the investment bank that underwrote the IPO, stood to bank millions in fees.
Fair enough. That's how investment banks and IPOs work.
But four months after making all that money, the sharks at Morgan Stanley pulled the rug out from under Snap investors, costing them a combined $3 billion.
Snap shares are now down 45% from their IPO price.
But you can avoid all that - and still make a ton of money on IPOs.
Don't get me wrong.
As a longtime advisor to Silicon Valley startups, I'm a big believer in the value of IPOs. The chance to take exciting new tech firms public and make their founders and early investors - and, yes, investment bankers - rich remains a driving force beyond behind Silicon Valley's huge success.
And new stocks are important for the overall market's health. For a bull market to keep running, it needs a steady supply of fresh cash. Nothing brings in money quite as much as hot new IPOs.
But there's a big problem. Most retail investors fare poorly in the early days and months of trading a new stock. This is when the shares are most volatile and subject to profit taking after employees and others bound by lock-up periods can sell their shares.
The case of Snap shows another big red flag, this one direct from Wall Street - disreputable practices from the likes of Morgan Stanley.
Here's what I'm talking about. Shortly after Snap issued its first earnings report as a publicly traded firm, on July 11, its own investment bank downgraded the stock. Shares have lost more than 20% since then.
Yes, I know that the analysts work separately from the underwriters - but the whole thing smells bad.
That's why I believe now is a great time for tech investors to take a hard look at this...
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Big Returns... Stable Investment
The First Trust IPOX-100 Index Fund (NYSE: FPX) tracks the market for IPOs and is one of my favorite exchange-traded funds (ETFs).
By all accounts, the IPO market has a clear head of steam these days. More than $11 billion was raised by 52 firms in the second quarter, the best showing in two years, according to Renaissance Capital. Much of the action is in the all-important tech sector.
In fact, the IPO market has already raised more capital in the first half of 2017 than in all of 2016. Just as important, the average 2017 IPO is up 11% since its initial offering price.
FPX is an ETF I think every tech investor ought to consider holding 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 the fund's managers do all the heavy lifting - and you sit back and watch the profits pile up.
Let's be clear about one thing. Strictly speaking, FPX doesn't specialize in new tech stocks. Instead, it seeks to mirror the broad market for new issues.
That's a good thing. FPX gives us a good combination of tech stocks and broad diversification. That makes it a great "twofer" in which 45% of its top holdings relate to tech or the life sciences.
FPX, which holds about 100 stocks, also gives us access to finance, auto, retail, heavy industry, energy, and a smattering of metals.
Of course, the fund's managers don't invest in every IPO that comes along. These are focused and disciplined managers who seek to balance big returns with stable investments.
Indeed, FPX is weighted toward mid caps, with a median market cap of $5.6 billion. And the managers have acquired a long list of winners.
Let's take a look at four of them...
Four Wealth Builders
- Kite Pharma Inc. (Nasdaq: KITE) is a leader in an emerging form of medical therapy that uses our bodies' own T-cells. Kite is already testing its biotechnology, known as CAR T therapy, against a range of cancers. The results have been impressive, with 70% to 90% complete response rates for patients. Over the past three years, Kite has averaged yearly sales growth of 131%.
- Zayo Group Holdings Inc. (NYSE: ZAYO) helps Internet files zip across the country and across the globe in an instant, thanks to its 122,000 miles of high-speed fiber-optic lines. The firm was quite savvy in buying up thousands of miles of unused "dark fiber" that is now being leased by a broad range of office parks and telecom firms. Sales look to grow nearly 30% this year.
- Square Inc. (NYSE: SQ) was once thought of as an also-ran in digital payments. But it's now growing far faster than the big credit card firms. Plus, it's competing against - and often beating - tech giants like Apple Inc. (Nasdaq: AAPL). In the most recent quarter, retailers and service providers processed $16.4 billion in sales on Square's servers. That's up 32% from a year ago. Square's running string of blowout quarters has helped it power up gains for itself, its investors - and the FPX fund.
- Thanks to a constant focus on innovation, Arista Networks Inc. (Nasdaq: ANET) has emerged as one of the fastest-growing suppliers of Internet traffic control systems. In the process, it has steadily taken market share from much larger firms like Cisco Systems Inc. (Nasdaq: CSCO). Arista has been boosting sales at a 53% yearly clip. And it shows no signs of slowing down as second-quarter earnings were fully 41% ahead of forecasts.
Now trading at just $59.47, FPX is the most cost-effective way for the average investors to cash in on lucrative IPOs.
Since the market sold off in February 2016, FPX has returned 41.5% to investors, beating the S&P 500's profits during the period by more than 20%.
I see no reason why it can't keep doing so for at least the next two years, given how active the IPO market has become.
This is the kind of ETF you want to hold for the long haul in order to tap the steady stream of new innovations represented by the rebounding IPO market.
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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.