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Don't Buy This IPO

Written by Briton Ryle
Posted September 9, 2019

It is a good luck tradition for my son and I. We always have a bowl of queso with chips ready to roll when they're flipping the coin at the start of every Baltimore Ravens game. 

Sadly, yesterday was different. Oh, I had the queso perfectly warmed out of the microwave as Justin Tucker teed up the pigskin. But Henry went to watch the game with friends at the Baltimore County outpost of the University of Maryland. 

Never one to buck tradition (or invite ill tidings on my team), I ate the queso myself. Fortunately, the Ravens’ revamped offense earned the team a huge lead early on, because I had to take a nap midway through the second quarter. 

Queso got me a nap. But if you're a Chipotle shareholder, you've got queso to thank for basically saving the company and getting a ~95% rally over this year. Amazing...

OK, it might be a stretch to say that queso saved Chipotle. The company has a great model and loyal customers. It's not totally shocking that it overcame its food-borne illness problems from fall of 2017 (when shares fell below $300).

Chipotle shares are hitting new highs around $840. And the reality is that queso sales are helping — a lot. 

The company is currently clocking 4.4% sales growth, which is really good for a $23 billion restaurant chain. And queso sales are responsible for half of that growth. We're talking about $114 million worth of freaking melted cheese...


And what's even more amazing is that the good(?) analysts over at Wedbush think it's a fine idea to pay five times revenue for the stock. They missed the entire 95% run for the stock, and so today they are raising their rating to "outperform" and putting a $980 price target on the stock...

I mean, thanks for that. But wouldn't this upgrade have been more helpful when the stock was at $500???

Standard Operating Procedure

Of course, this kind upgrade is akin to closing the barn door after all your horses have run away — a little late to do much good. But that's how Wall Street works these days. The investment banks and their analysts are not here for you. Their dual mandate is to attract investment banking business from companies and to get high net worth clients on board. 

The fact that they don't have the interests of the average investor at heart isn't necessarily a bad thing. What's really important is that you know how the game is played. 

In both of these cases, it's your money they want.

Think about it. By the time Wedbush puts out a press release to the general public that it thinks Chipotle is a really great stock to own, don't you think its best clients have already been told? Why do you think the stock has rallied 35% since June? 

Of course, nobody makes an actual profit until they sell. Hence the press release telling you it's a good time to buy Chipotle...

Same thing is happening with Roku today. SinTrust — I mean SunTrust, sorry — is raising its price target on Roku from — get this — $63 to $160!! And the stock is trading above $170 this morning! This might be the most unhelpful upgrade I've ever seen. 

Here Comes ARAMCO

The most dangerous time for individual investors is when an investment bank first gets its teeth into a stock. That's because the stock likely has some momentum going. And it's also when investors don't understand the full story.

Now, one of the biggest money grabs in history has Wall Street drooling. I'm talking about the IPO of the Saudi oil company ARAMCO. The numbers are mind-boggling...

The Saudis say ARAMCO is worth $2 trillion. They want to sell $100 billion worth for cash money. And it looks like Jamie Dimon and JP Morgan are getting the lead. Rumor has it that Morgan Stanley lost its bid after it shafted the Saudis with some ridiculously overvalued Uber stock at $45 (trading for ~$32 now).

I'm going to say this as clearly as I can: DO NOT BUY ARAMCO STOCK

The whole point of investing is "buy low, sell high." If the Saudis want to sell their crown jewel, what does that mean? I think it means ARAMCO won't ever be worth more than it is right now. 

So if you really wanna profit from the ARAMCO IPO, here's how.

The Saudis are trying to push the IPO to November. And there's just one thing that will make this IPO work: higher oil prices. 

Now, the Saudis just replaced their oil minister with one who will keep the production cuts coming. Tighter supply means higher prices...

Oil's gonna rally. But the way to play it isn't with U.S. oil companies. Too much debt. 

Your best bet is call options on the United States Oil Fund (NYSE: USO). Or if you really wanna get wacky, check out the triple-leveraged United States 3x Oil Fund (NYSE: USOU) and get three times the price action. 

You're welcome. 

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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