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Enjoy the IPO Market’s “Candy” – Without Getting Crushed

14 | By Michael A. Robinson

Over the last month or so, I’d bet that I’ve seen three or four dozen stories about the initial public stock offering (IPO) of King Digital Entertainment, the company that markets the smash hit Candy Crush Saga game for smartphones.

And with every single story I just shake my head and grin.

The high-tech IPO market, as we’ll see in a minute, is hot … white hot. And I grant you that King Digital is currently a better financial proposition than, say, arch-rival Zynga Inc. (Nasdaq: ZNGA) – which is rolling up losses in a way that should scare investors away.

But as alluring as the IPO market can be, it’s not a place to play unless you have the “connections” needed to access the best deals – or have a special “angle” to play.

I can’t help you with the connections.

But I can give you that special angle.

And that angle will give you access to the profits that roll out of the IPO market – but at a much lower level of risk.

So at your next corporate retreat – when your co-workers are lamenting the shellacking they took from a less-than-stellar IPO deal – you’ll be able to boast that you cashed in … and, in fact, are still cashing in.

Let me show you how.

An Insider’s View

As a tech-sector insider, I’ve watched, played and profited from IPO deals for years. So I understand the allure. I mean, who wouldn’t want to pull down a year’s worth of profits from the one stock-offering deal that everyone has been talking about – to be able to smile and see the envy on co-worker’s faces when you tell them: “Yeah, I had a piece of that.”

And right now, the allure is as strong as it’s been in years.

In that regard, 2013 ranks as a milestone in the five-year rally from the when the market hit bottom in early 2009.

Market research firm Dealogic says there were roughly 230 U.S.-listed IPOs issued last year – a 58% increase from the 145 deals of 2012 and a high-water mark that came five years after the bear-market bottom of 2009.

Those offerings raised $61.7 billion, up 31% from a year earlier – and the largest annual haul since 2007.

Tech investors were especially well rewarded. Although these stock offerings averaged a 33% return, the tech-focused deals generated an average gain of nearly 60%, Dealogic says.

As good as all that sounds, the best is yet to come. A recent report by consultant Ernst & Young says 2014 is shaping up to become a “record year” for worldwide new issues.

“The strong recent uptick in listings indicates a recovery in investor confidence and better market fundamentals,” the report says. “The overall trend is an improving one, and activity should trend noticeably higher in 2014.”

Little wonder folks are drooling about the King Digital deal, which could value the company at $7.6 billion.

But there’s just one problem…

Most retail investors won’t profit from this deal … because they’ll never get a piece of it.

A “Crushing” Truth

It’s a hard reality to accept: If you’re not an “insider” – like the venture capitalists, investment bankers or early employees who have a connection with King Digital, and were granted shares in return – you’ll be watching from afar when this IPO makes its debut.

And even if you had a shot at some of the small allotment that makes its way to brokers, keeping track of when a new issue is to hit the market is really tough for an individual investor to do.

It’s not unusual for both the timing and offering price to change several times in the weeks before the IPO begins trading.

Given all these factors, most retail players end up buying the stock after it starts trading – at the inflated post-offering price. That means you can easily lose money – even a lot of money – if you snag the shares at their peak, and then watch them close down from that apogee for the session.

That often occurs, and I think the odds are good that’s what will happen with the “Candy Crush” IPO.

But don’t worry: There’s a better way to play …

A Rare Market-Beating Bargain

A year ago, when I saw that the IPO market was accelerating, I set out to find a way for retail investors like you to cash in – without getting burned.

And I quickly found what I was looking for.

My “solution” – the First Trust IPOX-100 Index Fund (NYSE: FPX) – is an exchange-traded fund (ETF) that focuses on IPOs. And though it doesn’t specialize just in tech stocks, it does attempt to reflect the broad market for new issues.

I like to think of this play as a “twofer:” You get some hot new tech offerings and broad diversification with a fund that owns a total of 100 stocks. FPX also holds positions in finance, auto, retail, heavy industry, energy and even metals.

Because this is a “rules-based” ETF, the managers don’t let themselves get caught up in all the hype that can surround some IPOs. For instance, the fund only invests in a stock after doing a thorough review of the company’s financials and never buys on opening day. And it sells each stock after holding it for 1,000 days.

By definition, the ETF doesn’t invest heavily in the sexiest small and micro-cap firms. Instead, it is weighted toward mid-caps that have an average market valuation of roughly $3.3 billion.

With this approach, the fund puts money into firms still small enough to offer a hefty upside – but still large enough to avoid the high volatility of more thinly traded stocks.

Consider that two of its largest holdings have greatly outperformed the broader market over the past year. Facebook Inc. (NasdaqGS: FB) is FPX’s top holding, comprising nearly 12% of the fund. After a disastrous 2012 IPO, the stock is up 150% since March 2013.

Over the same 12-month stretch, electric-carmaker Tesla Motors Inc. (NasdaqGS: TSLA) returned an astounding 525%. Tesla shares account for about 3% of FPX, meaning the stock ranks as one of the ETF’s Top 10 holdings.

One of the things I really like about this fund is how it balances its big caps against smaller firms in a way that gives its investors access to some really good companies in high-tech and the biosciences. Holdings include:

  • NXP Semiconductors NV (NasdaqGS: NXPI), one of the Top 20 companies in the world for sales of semiconductors. NXP is involved in some of the best growth markets, including mobile and wearable technology. Over the past year, the stock has gained roughly 85%.
  • Splunk Inc. (NasdaqGS: SPLK), a Big Data software firm. Splunk’s products help clients in the collection, monitoring, analysis and use of huge data sets – an evolving field with some incredibly exciting applications. Even after a recent 12% correction, the stock has a one-year return of 115%.
  • Pandora Media Inc. (NYSE: P), a global leader in streaming music. Pandora lets users create and customize what amounts to their own Internet radio stations. This stock shows one of the hazards of buying a single IPO. It has more than doubled in the past year. But in its first 18 months’ of trading, the stock crashed by 54%.
  • Clovis Oncology Inc. (NasdaqGS: CLVS), a biotech firm working to develop cancer treatments. Clovis is currently focused on compounds for treating cancers of the lungs, ovaries and breasts. Over the past year, the stock is up 181%. But like Pandora, it also demonstrates the risks of single-stock IPO investing: Since March 2013, Clovis has racked up five corrections – with losses ranging from 10% to 34%.
  • Palo Alto Networks Inc. (NYSE: PANW), a Silicon Valley software company specializing in cybersecurity. Palo Alto’s “firewall” products give protection to big companies and major government agencies. After losing 20% of its value in 2013, the stock is up nearly 40% over the past year.

Now you know why I think of FPX as a “no-brainer” way to play the hot IPO market. The fund keeps you from experiencing the gut-wrenching roller coaster rides that often define the first few months of a new stock’s life. And that keeps you from getting old before your time.

And it does this while helping you grab shares in companies at prices that you might otherwise not get.

Now trading at around $47.10, we view the FPX ETF as the single-best way for most investor to cash in on the burgeoning IPO market.

It offers regimented approach to the new-issues market that is less-risky than individual IPOs, but that can still give you one heck of a return: The ETF has returned 36% over the past year – almost exactly a double the performance of the Standard & Poors 500 Index during the same period.

In short, this is one of those ETFs that – years from now – you’ll be giving thanks for having bought.

And if stock offerings like Candy Crush’s King Digital turn out to be the stock-market equivalent of junk food, you won’t end up like every other person who enjoys a “sugar high” – because you’ll avoid the subsequent sugar crash.

After all, too much sugar leads to cavities … even in your portfolio.

See you folks later this week.

[Editors Note: Are you a Candy Crush fan? How do you see their IPO going down? Leave your comments below. ]

14 Responses to Enjoy the IPO Market’s “Candy” – Without Getting Crushed

  1. Don Schraier says:

    Just like all the other IPOs – impossible to buy individually (outside of a fund grouping) unless you’re a very rich investor. The game is fixed. Can you help?

    • William Patalon III says:

      Dear Don:

      We couldn’t agree more. Michael has made this point here a couple times. I think his solution — the best way around it, at least for now — is the strategy that he’s detailed here. I recommended this to my own subscribers in Private Briefing — on Michael’s say-so — and know that folks who acted on this recommendation have done very well.

      Cheers

      William Patalon III
      Executive Editor
      Money Map Press

  2. Margie Fincham says:

    As an addict of the King Entertainment products–Candy Crush, Pet Rescue, and Pyramid Solitaire–I see the IPO as an “in the future” bye. However, after reading the evaluation of buying initial IPOs, I totally agree with the information provided.

    My late spouse and I had insider stocks from four early computer stocks in the 1970s that we could use to paper our walls. However, we also started our own computer related business with insider employee stock from a fifth company in the early days of desktop printers.

    Thank you for the astute overview of the early IPO prospective. I would choose the ETF for sure.

    • William Patalon III says:

      Dear Margie:

      Thanks for some shrewd insights and for sharing some experiences that I think will be helpful to some of our readers. We’re grateful for your time and contributions.

      Sure hope you post again … and often.

      Respectfully yours;

      William Patalon III
      Executive Editor
      Money Map Press

  3. biotechguy says:

    This article is very misleading at best. It implies that small investors who are shut out of new issues before they go public can participate in them through FPX. That simply is not the case. FPX buys stock in the open market AFTER companies go public, just like small investors can do, and pays the often higher price these companies trade for after their IPO. You can do this yourself — you don’t need FPX to do it. And, you can be more selective than FPX is.

    • William Patalon III says:

      Dear BiotechGuy:

      This isn’t misleading at all. You essentially repeated — verbatim — what Michael said in the article. The reality is that retail investors aren’t going to get a piece of the hottest deals. But rather than blunder about in the aftermarket — getting clobbered in the process — Michael came up with a nifty solution that allows investors to reap big gains on the best IPOs, letting professional quants who employ a rules-based strategy do the heavy lifting for them.

      And the proof is in the pudding, as they say. And by that, I mean the rules speak for themselves. Instead of getting clobbered in the aftermarket, this ETF lets investors clobber the broader market –most recently earning double the broader market’s return.

      If you have a better answer, we’d love to hear it. But in all honesty, you reiterated the same case we made in this column. The bottom line here is that Michael once again performed a great service for his subscribers — which is our goal here, two times each week.

      Sorry to be a bit harsh — as most folks know, that’s not my nature. And I respect your right to have an opinion — which is why we aired your thoughts by posting them. But I thought your comments on this were more than a little unfair, and misrepresented what we were attempting to do here.

      Respectfully yours;

      William Patalon III
      Executive Editor
      Money Map Press

      • Michael says:

        I would like to see Michael discuss buying pre-IPO’s through crowd-funding. I have looked at some but it seems that you still have to be an accredited investor. Is there a crowd-funding company that will allow one to invest a small amount of money without having to disclose their net worth and income? It’s my money, why do they care how much I have?

  4. Steve says:

    I’m fairly new to Money Map but I appreciate the straight forward and honest reports that Michael gives. This advice on IPOs, I thought, was very helpful. It was easy to grasp and gave a genuine solution for the retail investor like myself to follow if I chose to — and I do chose to! Thanks Michael for your insight. This investor appreciates it very much.

  5. M J says:

    I always accept watever Micheal A.Robinsn’s guidanceand advises!
    He made me his believe keep up good work Micheal,
    I appreciated an advance .

  6. BERNARD NARCY says:

    I don’t involve myself in comments but i will make an exception this one time. Right on Michael.

    • William Patalon III says:

      Dear Bernard:

      You clearly come from the Teddy Roosevelt school of commenting: “Speak softly and carry a big stick.” In other words, you don’t comment often, but when you do, you have something intelligent to add to a conversation.

      On behalf of Money Map Press, and of Michael, who spoke to me about your posting, allow me to formally and sincerely say “thank you” for this particular comment.

      And I really mean that.

      I will tell you that Michael, myself and Associate Publisher Terry Weiss give thanks each and every day for having such an intelligent, committed and upbeat readership in the newsletters we offer — including Strategic Tech and others such as Nova-X Report and Private Briefing. You folks are the reason we get to do this each day, and motivate us to always give our best.

      Comments like this just remind us how fortunate we have been.

      Thank you again.

      Respectfully yours;

      William Patalon III
      Executive Editor
      Money Map Press

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