Top Advisors Corner

Mary Ellen McGonagle: How To Play The Hot IPO Market - One Sound Approach Can Get You In Front Of The Big Winners.

While the number of IPO’s listed in the U.S. continues to dwindle, there have been enough big winners in these newer issues to make it worth your while to check out these stocks.  After all, the powerhouse FANG stocks of today all started out as new issues.

To be fair, investing in new issues is not for the faint of heart as these generally smaller companies can be quite volatile. Most new IPO’s can bounce around for quite some time while growing but once investors see a promising trajectory of solid earnings and sales, shares can be bid up swiftly. 


Take payment processing firm Paypal (PYPL) which traded in a lackluster fashion for over 18 months following its IPO. (see below) This was despite posting decent earnings and sales. 

Strong Q1 Earnings This Year Finally Spurs Takeoff

It wasn’t until the company produced strong earnings despite a small drop in sales the 1st quarter of this year that investors took notice. This was a sign that existing users were using the service more frequently.  Even more encouraging was the pick-up in the number of users. The company added 6 million new users that quarter which was up 11% over the prior year. Management also announced initiatives aimed at deepening their reach with merchants while simplifying user experiences among their growing client base.  

All of this pointed to continued growth and the company has gone on to almost double since that 1st quarter report over the last 8 months ago.

Other IPO’s will have meteoric rises despite a lack of earnings. This is because investors are looking at other metrics to gauge growth. Shopify (SHOP) is a good example of this. Shares of this stock appreciated over 500% before the company showed a positive quarter.  Investors instead paid attention to other metrics such as revenues and gross profits.  In addition, despite recording negative earnings, investors were spurred on by the fact that the company came in with a loss that was less than expected.  Exceedingly strong customer base growth was also viewed as a positive.

Stock Advances 300% From Base Despite No Earnings
In yet other cases, new issues will skyrocket with no sign of earnings or sales such as some of the winning Biotech companies that came public this year. (Think ALNA or ANAB). These companies are pouring capital into research and development and are oftentimes years away from producing a drug or device. Investors are instead sold on the possibilities and excitedly buy up shares.

While it may be difficult to determine what metrics investors will find compelling enough to drive an IPO up, there is one sound way to get you in front of winning new issues and just as importantly, get you out of the duds.

That is - knowing how to interpret the chart of the company’s stock. This will always be the best guide for formulating your entry and exit points.  Looking for sound breakouts on volume is one great tool.  The volume in these breakouts tells you that Institutions are bidding up shares and this support is usually a good sign.

Other key indicators include the RSI and MACD as shown above. And lastly, pay attention to the price of the stock vs their moving averages. In addition to wanting those MAVs in an uptrend, you want the current price above them for the least possibility of upside resistance. 

Using these same indicators to spot signs of a breakdown is going to be equally important as some of these IPO’s can drop dramatically.  Take a look at former Wall Street darling GoPro (GPRO) which is now down 92% from its peak in price 3 years ago.

Still unsure of which IPO to choose?  There’s an ETF that will give you exposure while reducing your risk to the IPO market.  It’s called the Renaissance IPO ETF (ticker IPO). The fund only holds 36 issues at this time but a quick check shows that they’re in some of the biggest winners this year (SQ, RACE & FDC are top holdings now) helping to push their performance to 40% ytd through last Friday.  

Not every year has been a winner for this ETF however so putting your own technical analysis skills to work appears to be the best way to go for those that are willing to push their shirt sleeves up.  The effort should be well worth it based on some of the bigger winners over the last year or two.  The possibility of getting into the next Facebook or Amazon should be enough to get you starting your research.

If you’d like to find out more about how to spot winnings stocks, you can sign up for my 4-part mini-course offered at no cost. Simply use this link to sign up.

Mary Ellen McGonagle
President 
MEM Investment Research
www.MEMinvestmentResearch.com

 

 

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