Overhyped IPO: Two Ways to Increase your Chance for Success
In late 2015, Ferrari (RACE) raced onto the market floor at a high of $60 a share.
However, as we explained prior to its IPO, it was a terrible buy, overvalued at the time with a $12 billion IPO. Initial requests for shares had exceeded supply by 10 times, as we noted.
Investors were still excited. Anticipation was high.
But we had seen this before many times with overly hyped IPOs, explaining that the only people that make any real money from such excitement are the underwriters and those that can get into an IPO early enough. Unfortunately, in many instances the last people that will ever make money from an IPO out of the gate are your average investors.
In fact, on the day of the Ferrari IPO, small investors jumped in. Demand outweighed supply.
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We can imagine that many of the retail investors were shocked when Ferrari plummeted from $60 to $33 within two months. That’s the key reason you never want to buy an IPO out of the gate because in many ways the game isn’t rigged in your favor.
Instead, as we also noted prior to IPO, it’s better to wait for the hype to deflate.
Then, should the stock still look fundamentally attractive as believed, it may be worth a buy, as Ferrari turned out to be prior to a run to $128.
We’ve seen this move before.
When Twitter began trading, it was over-subscribed and over-extended. Without a profit, it hit the market at 70x sales with a wild $35 billion market cap. That didn't stop investors from crowding the stock out of the gate, though. After being priced at $26 the night before, the stock began trading at $45.10 a share before jumping to $50.09. Investors chased it, only to watch Twitter close the day at $44.90 – 73% above the IPO price. While the stock would eventually be chased as high as $75, once the hype died, Twitter fell to $30 a share.
When Groupon IPO’d in 2012, it was considered one of the hottest opportunities on the year. Analysts upgraded the stock left and right. Investors rushed to buy, sending the stock to $31.14 out of the gate. It would lose 50% of its value that same month.
As you’re well aware, IPOs are all about increasing value for owners, institutions and private investors. When it comes to any IPO, if it’s overly hyped with a gargantuan valuation, stay on the sidelines and wait for the likely pullback.
We must consider that the little guys of Wall Street won’t be on the receiving end of substantial profits on the first day, if at all. The same applies to most hotly anticipated IPOs on the market.
If you like the stock so much, have patience and wait for it to go down. You should be able to buy it at a much lower price several months down the road.
However, if you truly want to participate in IPO excitement, you can own all new IPOs at $70 and stand to do much better than buying an IPO outright.
The First Trust IPO Index Fund (FPX) allows you to do just that.
The FPX tracks hot IPOs in their first 1,000 days of trading. By buying it, not only can you avoid paying gobs of money for IPOs that may or may not work out, but you’re also being exposed to multiple hot IPOs at the same time at lesser cost.
Plus, as you can see, it never once took a hit on the SNAP IPO either. In fact, even with some of the most obnoxious IPO failures, the ETF managed to run from a 2009 low of around $11 to a recent high of $70. It’s a safer alternative than risking your hard-earned money to another potential flop, as SNAP-like stocks turned out to be.
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