History is littered with examples of investors who’ve blindly bought into the hype over a stock market débutante… and endured a brutal body check for their efforts.
Indeed, while Wall Street and the media like nothing more than to jump on the latest hot stock market offering and whip the masses into a frenzy, not all Initial Public Offerings (IPOs) are created equal.
With that being said, there’s still plenty of money up for grabs when companies go public. But you have to be able to tell the good from the bad...
For instance, the IPO market is one of the best places to invest following a recession. And the profit potential increases if the slump is prolonged.
Take the recession of 1973 to 1975, for example. The period featured high unemployment and war. Sound familiar? But as the United States emerged from it, the IPO market heated up. From 1975 to 1979, IPO stocks returned an average 34% gain per year for investors — four times better than the Dow’s performance at the time.
And companies with viable, sustainable business models have not only enjoyed strong stock market debuts, they’ve also stood the test of time and have prospered ever since.
For example, athenahealth, Inc. (NASDAQ: ATHN) posted a 97% return on its first day of trading, and has jumped as much as 443% higher than its original offer price of $18. And Under Armour, Inc. (NYSE: UA) was originally offered at $13 and notched a 95% first-day gain. It now trades around $60 — 361% higher than its IPO price.
Still don’t believe me when I say IPOs can generate immense profits within hours? Here are a handful of other companies that minted waves of fresh millionaires within hours of going public:
A Millionaire MARKET
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This debunks a common misconception among investors that IPO gains are only reserved for a privileged few (company executives, hedge funds, and institutions). It’s just not true.
But again, many investors are hesitant to invest in the IPO market today. Here’s why they’re missing out — and how you can claim your share of the outstanding profits from this misunderstood secondary market…
You just need to follow two simple rules:
Rule #1: Don’t Get Caught Up in the Hype.
I’ve found that the most-hyped IPOs tend to be terrible investments. Why? Because prices run up too far, too fast, before everyday investors like you and me have a chance to buy shares. Sadly, the only ones able to book profits are insiders — hedge funds, mutual funds, and ultra-high-net-worth investors — who were fortunate enough to get an initial allocation.
But all hope isn’t lost. IPO riches are attainable. Which brings me to Rule #2…
Rule #2: Know the Signs That Indicate Investment Merit.
Once we shun the overhyped deals, we can instead focus on fundamentally sound, fast-growing, under-the-radar IPOs.
The Top Four Ways to SPOT A HOT IPO
Long-Term Growth Potential: When you invest in an IPO, you’re investing in the future growth of that company. So it stands to reason that if you jump on a company in the early stages of a significant, long-term growth cycle, you can scoop up handsome profits before the crowd catches on. Go for companies in markets that offer 10 years of growth potential.
Two Years of Profitability: Remember the old stock market adage, “Share prices follow earnings.” Most IPOs that fail after their stock market launch do so because they lack earnings. But if a company is growing the bottom line, the share price is likely to follow. Roughly 75% of IPOs during the dot-com days couldn’t make the “profitability” claim… and they ended up in the trash heap. So insist on at least one to two years of profitable operations, and you’re more likely to avoid stepping on an IPO landmine.
$50 Million-Plus in Annual Revenue: Just as share prices follow earnings, they also follow revenue, according to University of Florida research. The key question is whether or not a company had sales of $50 million in the year prior to going public. Those that did rose by an average of almost 40% over the following three years. The companies that weren’t above the $50-million threshold only posted a 5% return over the same period.
Age: Make sure a company has existed long enough and has demonstrated long-term viability by the time it hits the stock market. Why? Because the older and more established a company is when it goes public, the better its shares tend to perform. Such proven viability isn’t something you could say about most IPOs during the dot-com collapse. The average IPO back then hit the market at just four to five years of age.
Essentially, when you’re investing in IPOs, follow the same rules as you would for other stocks. Namely, that fundamentals ultimately drive share prices. So use the guidelines above. The stronger the fundamentals, the greater the profit potential.
In addition, look for companies that intend to use IPO money for upgrading or expanding the business, rather than just lining the pockets of the executives and preferred investors. This helps filter out the overly hyped, more-speculative offerings and, instead, places the focus on robust, long-term fundamentals.
In fact, we’re currently tracking two such IPOs about to hit the market that could prove to be more profitable and create more new wealth than any of those I mentioned above.
And now that you’re subscribed to Wealth Daily, you’ll be privy to that research, but in case you can’t wait to get into the IPO market, I’ve included a couple of easy ways here for any investor to get a piece of the action…
Just Hit the Easy Button – Exchange-Traded Funds
There are several exchange-traded funds (ETFs) that track a basket of recently minted public companies.
The shares can easily be purchased through your stock broker or online trading platform…
And they often trade for extremely reasonable prices.
Here are four of our favorites (in no particular order) that get you exposure to the extremely profitable IPO market and all trade for less than the cost of a steak dinner at Ruth’s Chris…
Easy Button #1: First Trust IPOX-100 Index Fund (NYSE: FPX)
Our first “Easy Button IPO Fund” is administered by First Trust Portfolios and is set up to seek results that correspond to the First Trust IPOX 100 U.S. Index…
This is a value-weighted index that tracks the performance of the top 100 largest, best performing, and most liquid U.S. public offerings.
It’s a rules-based index that measures the average performance of these IPOs during the first 1,000 days of trading.
The fund has far outperformed the S&P 500 since its inception on April 12, 2006 (169% to 54%), and counts giants and darlings such as Facebook (NASDAQ: FB), Phillips66 (NYSE: PSX), and AbbVie (NYSE: ABBV) among its top 10 holdings…
It’s got an expense ratio of 0.60% and a quarterly yield of about 0.68% and shows no signs of slowing from the breakneck pace that’s led to 184% gains so far.
Easy Button #2: Renaissance IPO ETF (NYSE: IPO)
Next on our list is another fund that tracks U.S. IPOs…
Although it only debuted in October of 2013, the Renaissance IPO ETF (NYSE: IPO) has already outperformed the market and, until the most recent broad market correction, had been up over 23%
The fund is set up to simulate the returns of the Renaissance U.S. IPO Index, which tracks the top 80% of newly public companies based on market capitalization.
Large IPOs are added to the index after their fifth day of trading and the rest are added during scheduled quarterly reviews and rebalances.
Holding stocks for a bit less time, IPO removes these new companies two years after their initial trade date as it considers them seasoned and no longer IPOs.
And just like FPX, the top 10 holdings contain market darlings and powerhouses such as Twitter (NYSE: TWTR), Alibaba (NYSE: BABA), and Hilton Worldwide (NYSE: HLT).
The fund sports the same expense ratio as FPX, but with a yield more than triple — clocking in at 2.19%
So, while it doesn’t have the same track record, with a solid yield and low expense ratio, this is a great option for dividend-minded income investors.
Easy Button #3: First Trust International IPO ETF (NASDAQ: FPXI)
Let’s talk about First Trust’s international IPO fund, FPXI…
Much like its domestic fund, the international one tracks the largest, best performing, and most liquid newly public companies…
The difference is that this one tracks the top 50 that are domiciled outside the U.S.
Diversification is always a good thing for any portfolio and one great way is by investing in foreign companies.
The First Trust International ETF was conceived on November 4, 2014 and had performed well up to the recent drop in Chinese markets, but has started to recover along with the S&P Global 1200 Index.
Its top 10 holdings are a bit skewed towards investments in China, but with a strong economy, a growing middle class, and a government willing to do what it takes to stay on top, investing with the Red Giant isn’t a terrible idea.
This fund has a solid quarterly yield of 1.53% and (due to its international exposure) has a little higher expense ratio of 0.70%.
Easy Button #4: Renaissance International IPO ETF (IPOS)
Last but not least, Renaissance rounds out our list with its International IPO ETF (IPOS).
Again, as with the domestic fund, this ETF tracks the top 80% of newly public companies in market capitalization terms and adds the largest IPOs after their fifth trading day (and the rest at the scheduled quarterly reviews)…
The difference? All of the companies in the index are based outside U.S. borders.
It’s got some similar holdings when compared to FPXI, but has performed much better in its short lifespan (it was created on October 6, 2014) — seeing an almost 30% increase before tough times in China took a toll. As the broad Chinese market recovers, so has the price of IPOS, though.
There’s no quarterly yield on this one, and it has a slightly higher expense ratio than the other international option (IPOS checks in at 0.80%), but that might be worth it when comparing the performance of the two.
IPO is the Way to Go
The bottom line here is clear: However you plan to go about it, adding IPOs to your investment arsenal is one of the best decisions you can make…
And subscribing to Wealth Daily is too — you’ll get breaking news stories, access to some of the greatest financial minds of our time, and a step-by-step, day-to-day guide to help you navigate the often-murky waters of the stock market.
So keep an eye on your inbox because, as I said earlier, we’re tracking two IPOs that are going to create so much wealth, it’s literally mindboggling, and I’d hate for you to miss your opportunity to get in at the ground floor on the next Baidu or Apple.