What to Do When the Largest IPO in History Hits the Market

Later today, the opening price of the largest IPO in history will be officially set. Then, tomorrow, Ali Baba (NYSE:BABA) will officially go public.

The IPO could raise a U.S. record of as much as $24.3 billion, putting its value at a total of roughly $160 billion. Only 3 tech firms can boast a bigger market cap: Apple, Google and Microsoft. That’s because Alibaba is the largest ecommerce company in the world.

Technically, this IPO won’t even give you any ownership stake in the company at all!

If you’ve never heard of it before, you’re not alone. In fact, according to a recent poll, 88% of Americans have never heard of the company either. But that hasn’t stopped the financial media from jumping at the opportunity to converge 3 of its hottest topics — tech investing, IPOs and Chinese stocks. The reality, however, is just that: it’s mostly hype.

Our advice? Don’t buy it.

No, wait: don’t even think about buying it.

The situation gets shadier and shadier the more we look into it…

First, Alibaba’s public filing’s say that a third of the shares aren’t bound by “lock up” restrictions. It’s not even clear who has the right to do it, but some of the “insiders” can sell their stocks “pre-IPO.” That’s something even the Facebook IPO didn’t do when its shares hit the market.

As you’ll recall two years ago, everyone thought Facebook was going to be a smashing success. It opened at $45 on the Nasdaq… three months later, it was less than $18 and dragging down social media and tech stocks with it. Keep that in mind when you’re reading about Alibaba in the mainstream news. But if that’s not enough to dissuade you, get this…

Technically, this IPO won’t even give you any ownership stake in the company at all!

The Chinese government restricts foreign ownership in what it considers to be “key strategic assets.” So they set up something called a “variable interest entity,” based in the Cayman Islands. Many forget: a similar situation happened back in 2011, when Yahoo, an investor in Alibaba, found out that, as foreign owners, they had no say in Alibaba’s operations. Alibaba co-founders Jack Ma and Simon Zie had the gall to transfer the Alipay bill-paying unit out from under Yahoo’s portion of interest. Heh.

Although the dispute was eventually settled, it was bad news for Yahoo in 2011. Will something similar happen to American retail investors in 2014? The situation becomes more curious when you consider that Alibaba didn’t do what’s typical for IPOs and appoint one bank to carry out the process. Instead, it divided the tasks among 5 different banks.

Why You Shouldn’t Worry About a Market Invasion

I could go on about it, but I’ll shift now to something that has apparently worried the American public. Many think that this Chinese company is going to take American market share from home-made companies like Google, Amazon and eBay. I wouldn’t be so sure.

Netflix and Walmart had a difficult time bridging the cultural nuances and tastes of foreign markets, and it seems like Alibaba will likewise suffer stiff competition from U.S. business before beginning to get a foothold. Their real market remains in China.

Consider that more than half of the Chinese population doesn’t even have an Internet connection. With a rising Chinese middle class, the path of least resistance for Alibaba’s ecommerce operations is back in China. So you can relax. It looks like they’re just hunting for foreign investors, and not consumers… for better or worse.

“…waiting for a pocket of investor demand before buying means… far less risk.”

But let’s assume that you were, in my mind, crazy enough to try to grab a slice of Alibaba tomorrow. Well then, the advice from our technical traders here in-house is unanimous: you better wait. According to our own Jonas Elmerraji, waiting would give the new stock a “chance to establish a trading history before you put real money on the line.” A wise approach.

“Sometimes, a new IPO stock moves pretty much straight up after going public. In those situations, waiting means that you’ll miss out on the very lowest buy prices. But that’s fine,” Jonas continues. “Even if you end up paying slightly more for shares, waiting for a pocket of investor demand before buying means that you’re taking on a position with far less risk.”

That same strategy let Jonas’ readers make 190% on Tesla. Jonas told his readers to wait four months after the carmaker’s IPO before buying in at $20.35. Then, when the price hit $59, he had them sell half their positions. Today, the price is at $265.40… which means that Jonas’ readers are still holding onto a half position that sits at 1204.18% gains as we go to press.

While Jonas says to wait before buying when it comes to tech IPOs these days, he takes a different approach when a rare opportunity arises. If possible, he says, buy the company before it goes public. That, as we’ve been pounding the table about over and over again, is where the real money is.


Josh Grasmick
for The Daily Reckoning

Ed. Note: This “pre-IPO” strategy is what the most successful serial-entrepreneurs are doing to make money. But investing in risky, private tech companies with capable founders is difficult to afford.

Luckily there’s a workaround that can give you access to small tech companies that have yet to go public and have explosive growth potential. Best of all, you can buy and sell these trades through your basic online brokerage account. You just need to know how…

Readers of today’s issue of Tomorrow in Review received a unique opportunity to learn about this secret investment strategy for themselves. To make sure you don’t miss another great opportunity like this, click here now to sign up for Tomorrow in Review, for FREE.

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