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What Wall Street Won’t Tell You About the IPO Boom

5 | By Michael A. Robinson

Investment bankers love to brag about successful initial public offerings – like the one earlier this year from Spark Therapeutics Inc. (Nasdaq: ONCE).

That’s because IPOs can be a great source of wealth. Since Spark, a gene therapy biotech firm, began trading Jan. 30, the stock is up roughly 100% from its offering price of $23.

But here’s a little secret that Wall Street doesn’t like to talk about – most retail investors can’t get anywhere near hot IPOs, like Spark’s.

The vast majority of these initial shares are allocated to mutual funds, hedge funds, pension funds, insurance companies and high-net-worth individuals. That means retail investors like you have to pay a premium for the stock after it’s already begun trading, seriously cutting into your profits.

So today, I’m going to show you a way to side step Wall Street and play the IPO boom…

I’m a Believer

Don’t get me wrong. I’m a big believer in IPOs.

IPOs are one of the main reasons why Silicon Valley can bring us a steady stream of innovations. Initial offerings give entrepreneurs the opportunity to go from early-stage startups to publicly traded firms in just a few years.

And you’d be hard pressed to find a better IPO environment than we have right now.

Some 275 companies went public in the United States in 2014, the highest number in 14 years, according to market trackers Renaissance Capital. The total value of 2014 U.S. IPOs was $85 billion, a 55% increase from 2013.

High-tech and life-sciences firms played a big role there. Together, they accounted for 57% of new issues.

While it may not eclipse 2014’s boom, this year is already shaping up to be another big one. Roughly 200 firms are on track to issue stock this year.

And that will create a lot of wealth.

The Secret Way to Profit

That’s why now is a great time for tech investors to take a good look at the First Trust IPOX-100 Index Fund (NYSE: FPX), which tracks the market for IPOs and has long been one of my favorite exchange-traded funds (ETFs).

And I think every tech investor ought to consider holding it for the long haul. By doing so, you can grab the upside and excitement that IPOs offer without all the volatility inherent in new issues.

In other words, let FPX’s fund managers do all the heavy lifting while you sit back and watch the profits pile up.

Now, FPX doesn’t specialize in new tech stocks. Instead, it seeks to mirror the broad market for IPOs.

And that’s a good thing. FPX gives us a good combination of tech stocks and an entry into the broader market. That makes it a great “twofer” in which 40% of the top 20 holdings relate to tech or the life sciences.

FPX, which holds 100 stocks, also gives us access to finance, auto, retail, heavy industry, energy and a smattering of metals.

The fund’s managers don’t invest in every new IPO that comes along. Instead, these are focused and disciplined managers who seek to balance high returns with stable investments.

Indeed, FPX is weighted toward mid-caps, with a median market size of $5.6 billion. And the managers have been lucky enough to acquire stocks that cost just a little more than one times sales.

Over the past year, Facebook Inc. (Nasdaq: FB) has remained FPX’s top holding, accounting for just under 10% of the fund.

I can see why. Facebook continues to ramp up sales across the board. In the most recent quarter, it reported 1.4 billion users (roughly the size of China‘s population). It also has 700 million users for its WhatsApp servers, 500 million Facebook Mobile users and 300 million people on Instagram.

But FPX has several other very impressive entries. Let’s take a look at four of them:

  • Alibaba Group Holding Ltd. (NYSE: BABA) is the leading Chinese e -commerce conglomerate, owning multiple Web-based companies. They cover everything from online consumer marketplaces to advertising exchanges for business. Alibaba also is a major provider of cloud computing services for Chinese companies. Here in the United States, it’s best known for its record-setting $25 billion IPO last September. With a market cap of $213 billion, it has 37% operating margins.
  • Delphi Automotive PLC (NYSE: DLPH) is a play on the booming new-car market and a great investment in the tech-centric “connected car.” Among other things, Delphi develops and manufactures such safety features as adaptive cruise control, lane-departure warning systems and front and rear cameras integrated with collision-avoidance radar.
  • Splunk Inc. (Nasdaq: SPLK) is focused on Big Data. Specifically, it analyzes “machine”-generated data. That’s a loose term that covers the Web, computer servers, networks, mobile devices and the billions of sensors in use around the world. With a nearly $7.5 billion market cap, the company has weak profit margins but averaged a 57% annual sales growth rate over the last three years.
  • NXP Semiconductors NV (Nasdaq: NXPI) is one of the top 20 companies in the world for sales of semiconductors. It’s a standout firm in several key tech areas, covering everything from mobile payments to wearable tech to chip-based smart credit cards. With a $21.4 billion market cap, NXPI has a return on stockholders’ equity of nearly 52% and 20% operating margins.

Now trading at around $52, FPX is priced cheaper than many of its portfolio holdings.

That’s why I think this is the single most cost-effective way for the average investors to cash in on the IPO boom.

Over the past two years, FPX has returned 51% to investors, beating the Standard & Poor’s 500 Index‘s profits during the period by more than 40%. I see no reason it can’t do the same for the next two years, given how active the IPO market has become.

FPX fits in two of our investment categories. It’s clearly focused on companies that have a lot of growth ahead.

And at the same time, this is a sleep-easy investment – a solid tech foundational play that puts you on the road to wealth.

You may not have the secret “membership card” that gets you invited to the IPOs of Alibaba, Shake Shack Inc. (NYSE: SHAK) and Spark Therapeutics.

But you’ll soon find FPX to be the next best thing.

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5 Responses to What Wall Street Won’t Tell You About the IPO Boom

  1. Chuck W says:

    Michael, you continue to be “de man” with your unselfish freebies. THANX for the info on FPX; think I’ll pick up some shares.

    Chuck

  2. a stockley says:

    “275 companies went public in the United States in 2014, the highest number in 14 years”
    Thanks for reminding me, fourteen years ago was 2000 the year of the tech bubble and the start of the two tear bear market.

  3. Marnie Jacobsen says:

    I invested in FPX when you first brought it to our attention in July 2014 or at least that was when I bought it. The price has risen approx. 30 %. I am very satisfied with the return. Thank you

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