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The Secret Way to Profit From the Largest IPO Ever

6 | By Michael A. Robinson

If you couldn’t get a piece of the largest IPO in history a couple of weeks ago, you were far from alone.

I think the Alibaba Group Holding Ltd. (NYSE: BABA) initial public offering will go down as the greatest wealth opportunity of a generation – but only about 4% of the $25 billion worth of stock went to individual investors like you.

As alluring as Alibaba and the white-hot 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 rolling out of Alibaba and the IPO market – but at a much lower level of risk.

So, today I’m going to show you a far better way to gain access to Alibaba’s huge profit steam at a nearly 50% discount from the stock’s current price – and at a much lower level of risk.

And I think you’ll beat the overall market by some 80% over the next two years…

The Lifeblood of Silicon Valley

As a tech insider and someone who’s watched and profited from IPOs for years, I know that Silicon Valley runs on IPOs. The promise of buckets of IPO cash is why venture capitalists back promising tech companies in the first place.

Not only that, but a healthy IPO market is good for stocks in general.

Bull markets like the one we’re in run on fresh cashing flowing in. And there’s nothing quite like an IPO to keep investors buying stocks.

The good news here is the IPO market right now is the healthiest it’s been in years.

According to Dealogic, the Alibaba IPO brought the value of deals so far this year to $69 billion. That’s up 11.2% from the same period last year and puts it on pace to be the best year for IPOs in a decade.

In other words, Alibaba had a successful IPO in a great climate for new issues – and all that bolds well for the market as a whole.

But for retail investors, Alibaba represented three negatives. First, it was hard to obtain shares. Second, retail buyers paid a premium to the offering price. Third, Alibaba’s stock has been a mediocre performer since its launch.

Here’s how the math works out. Alibaba had a high of $99.70 on its opening day, Sept. 19. A retail investor who bought at the high market price that day closed the session down about 7%.

And in the first week of trading, Alibaba remained below its $92.70 opening price, at one point off as much as 14.2% from its first-day high.

Now you know why I’m telling individual investors to stay away from Alibaba in its first six months of trading – and to follow that advice for most IPOs.

Just look at one highly hyped IPO from earlier this year. Since going public on March 26, shares of King Digital Entertainment PLC (NYSE: KING) are down nearly 33%.

In cases like that, you get stopped out before the young stock stabilizes and begins its big move up.

A Wealth Builder

That’s why I believe every investor should own the First Trust IPOX-100 Index Fund (NYSE: FPX). This exchange-traded fund (ETF) gives you the great long-term upside from IPOs without all that short-term volatility.

Moreover, the IPOX-100’s managed to grab a piece of Alibaba, which now ranks as the fund’s eighth-largest holding, representing 2.8% of the total. So, by investing in FPX, you’ll get a slice of the Chinese e-commerce giant’s upside.

And the IPOX-100 is a great a “twofer.” As a fund that owns about 100 stocks covering the broad market, you get a combination of hot new tech stocks and diversification.

Of its top 20 holdings, 40% relate to tech or tech-centric healthcare. And the IPOX-100 also holds positions in finance, auto, retail, heavy industry, energy and a smattering of metals and materials.

The ETF doesn’t chase sexy small- and micro-cap firms. Instead, it is weighted toward mid-caps, with an average market valuation of $3.3 billion.

This is why this ETF represents such a net worth-boosting opportunity.

Its holdings are small enough to offer solid upside, but large enough to avoid the high volatility of more thinly traded stocks.

Consider that two of the IPOX-100’s largest holdings have greatly outperformed the Standard & Poor’s 500 Index over the past year.

Tesla Motors Inc. (Nasdaq: TSLA), whose stock debuted in July 2010, returned roughly 27% to investors over the past year. That’s 50% better than the overall market. Accounting for about 2.2% of FPX, Tesla is the fund’s 11th-largest holding.

And Facebook Inc. (Nasdaq: FB) is the ETF’s top holding, making up more than 10% of the fund. Facebook had a disastrous IPO in May 2012, but it’s up 57% in the past year, roughly three times the return of the S&P 500.

Another aspect I really like about this fund is how it balances its big caps with smaller firms that touch a wide range of high tech and the biosciences. 

Take a look.

  • FleetCor Technologies Inc. (NYSE: FLT), which launched its IPO in December 2010, is a leader in fleet management, digital-payments processing and virtual cards for the energy and logistics industries. Over the past year, it’s beaten the overall market’s return by roughly 50%, though it’s had a couple of pullbacks along the way.
  • NXP Semiconductors NV (Nasdaq: NXPI), one of the top 20 semiconductor companies in the world, places its chips in a wide range of tech sectors, from mobile to wearables. Its stock debuted in August 2010. Over the past year, the stock has gained roughly 91% – but it’s more than twice as volatile as the market itself.
  • Pandora Media Inc. (NYSE: P) is a global leader in streaming music online and allows users to create their own Internet radio stations. Pandora shows one of the hazards of buying into a single IPO. It’s more than doubled in the past two years and is at about breakeven for the past year – but it lost 54% of its value in the first 18 months after its June 2011 debut.

Now trading at around $48.50, the IPOX-100 is the single best way for most investors to cash in on the burgeoning IPO market. It costs nearly half of Alibaba’s opening share price and offers a far broader play.

Over the past two years, the IPOX-100 has returned 67% to investors, beating the S&P 500’s profits during the period by 80%. There’s no reason it can’t do so for the next two years, given how active the IPO market has become.

With FPX, you’ll experience the excitement of participating in brand-new stocks that beat the overall market but without all that risk and volatility.

As such, this is a unique investment that provides a foundational play, a focus on strategic growth and a foothold into Alibaba – maybe the biggest wealth opportunity of this generation.

Years from now, you’ll be glad you cashed in and were able to watch the IPOX-100 steadily increase your wealth.

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6 Responses to The Secret Way to Profit From the Largest IPO Ever

  1. William G. Wells, Jr. (Retired: Professor, Exec Asst To Apollo Program Director; retired Air Force Colonel who faced death--up close-- about 12 time as I recall) says:

    I would agree that FPX is a great way to participate in IPOs that are out of reach of many of us. But I’m also using options on some such as BABA and even with the market setback am doing okay with them. But thanks for the run down on FPX–and with the coming recovery expect to well with complementary options.

  2. Ronald says:

    what will be the effects of Africa economy,with this Ebola cricis,which seems to be a treat to the world global space,can it be contained, what are chemical compound of this virus,can it be distroy through research,base upon virus composition,countraction of of this germ?

  3. Ronald says:

    The world should be a place of prosperity and happiness for all our families and the children of this world,its not easy for you to watch a virus as ebola kiling your children before your eyes,and you stud there helplessly watching,without any cure to stop it,we do know its a scientific world we all are living in,what goes around in this world do comes around in this world of ours,having said that,we as a people,traders,business persons,politicians,governments,leaders,our very economy is at risk,children are dying and some of us stood there smiling as though all is well a good on this planet.there must be something we can do as intellegent human beings?

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