INITIAL PUBLIC OFFERINGS

 Initial Public Offerings seem to be a moot point right now, but that can change quickly. Especially if the market all of of a sudden capitulates. Ask yourself this question. Why are companies like Groupon and Yelp still looking to go public in the near future despite these market conditions ? Maybe they think we are near a bottom.

 

 Well it’s pretty simple, Initial public offerings are a fickle beast. The only constant, is how to buy them if you are a long term holder. Plus, it’s common knowledge that some of these enormous Initial Public Offerings valuations have been reset to the downside in this current market. So maybe some potential bargains will be coming to market in the near future. Here are some tips below on the subject:

 

LOOK AT THE PROSPECTUS- A lot of quality behind the scenes info is available in this type of legal document. Insider selling and compensation are always topics that can create negative interest. However, a prospectus is a great source for a general vibe on the company’s future prospects.

 

COMPARE TO INDUSTRY- Like most initial public offerings, stocks have peers. This type of due diligence only requires simple math that involves comparing revenues, earnings and market caps to see if the Initial Public Offerings in question is expensive or inexpensive relative to the group. For instance, if you buy an Initial Public Offerings that all of a sudden becomes worth 3x the market leader in the first two days of trading, it might be wise to take a profit.

 

DO YOU FLIP ?- The flipping of an initial public offerings is usually a sensitive topic. Most brokerage firms discourage it, but the strategy of selling quickly for a profit is often the safest way to play the spec names. However, massive gains can potentially be achieved if an investor does his homework and truly buys into the quality of the business. Do you think flippers of Google wish they still owned their positions instead of taking a small gain. Holding IPO‘s for the long term isn’t for everyone, but it’s something to consider on an individual basis.

 

DON’T WASTE TIME- This is something that many chasers of initial public offerings don’t seem to grasp. Let’s say Jane Doe has $100k at ABC Brokerage and a super hot deal is about to come to market. Now what I mean by super hot is 20x to 40x oversubscribed. Which basically means there are far more buyers than stock available. In this scenario, odds are that Jane isn’t going to receive an IPO allocation because institutions and super high net worth clients are going to take the overwhelming majority of the firms’ economics. Mainly because these super clients generate a large amount of commissions and if a bone is going to be thrown, it will be thrown to them. So in this case, if you are a regular investor and like the company, don’t make 25 phone calls trying to get offering shares. Save your energy and focus on your aftermarket strategy.

 

Check back for more color and insight on initial public offerings.