IPO Pitfalls (How to Max Your Gains)
“Everyone knows they can make a killing if they get in on the ground floor of an initial public offering…” — CNBC
Yesterday, high-priced exercise bike and treadmill maker Peloton filed confidentially to go public.
Maybe you’ve seen their commercials on TV.
The company sells its exercise bikes — at cost, apparently — for about $2,000. Want one set up? That’ll be another $250.
Then a subscription to the classes is another $468 a year.
Quit paying that hefty membership fee? Your $2,000 bike suddenly loses most of its biggest features…
It’s not hard to see why the Peloton IPO is going to get plenty of attention. This hot brand is probably printing money. That’s how it’s built up a $4 billion valuation in the private market so far.
But don’t buy this stock when it hits the market.
IPOs Are a Stock’s Top Floor, Not Ground Floor
Look, initial public offerings (better known as IPOs) are exciting.
But most people don’t know what they’re getting into when it comes to buying newly listed stocks…
Investors buy initial public offerings for one simple reason: They want to get in on a big idea at the ground floor.
But I’ll let you in on a little secret: As my colleague Greg Guenthner once put it:
“Buying an IPO doesn’t get you in on the ground floor. It gets you in on the top floor; you’re just hoping that the company keeps building more floors above you!”
By the time a company is big enough and successful enough to issue a public offering, the early investors have already made their money.
That’s not necessarily a bad thing, of course.
Quite often, companies are successful at building their businesses after going public and early investors are able to claim enormous gains.
But barring exceptional circumstances, the worst thing you can do is buy an IPO on day one.
The REAL Key to Successful IPO Investing
By now, you may be wondering whether it’s even worth investing in an IPO stock at all. The short answer is yes — you’ve just got to know how to do it with minimal risk.
IPOs can be lucrative investments if you know how to buy them the right way. This IPO buying strategy is so simple, in fact, that I can sum it up in a single word:
As investors, we’re programmed to act now. We’ve been taught to hurry up and trade before we miss out.
So the notion of waiting before buying an IPO name is unfathomable to most market watchers. But it’s the key to actually making money as an IPO investor.
Waiting gives a new stock the chance to establish a trading history before we put real money on the line; it’s the only way to gauge the impact of those investor hopes, dreams and anxieties that I mentioned earlier.
Sometimes, a new IPO stock moves pretty much straight up after going public. But that’s actually incredibly rare. More commonly, an IPO fizzles after hitting the market.
Protecting against that downside is more important.
So far this year, there have been 73 IPOs, including hot household names like Uber, Pinterest and Beyond Meat, the explosive food science stock that’s charged up triple digits since going public.
Even though it’s been one of the best market environments in history, the median IPO return this year is just 1.74%.
Simply put, for every Beyond Meat, there are lots of duds. The only way to tell which you’re getting is to wait for shares to establish some semblance of a trading history before getting in.
Sure, waiting on an IPO is harder than giving in to the excitement and hitting “buy.”
But the rewards are worth the cost. And it will put more cold, hard cash in your pockets as an IPO investor.
For Technology Profits Daily,
Chief Quantitative Expert