If ever there was a day to follow “Robinson’s Rules of IPO investing,” it was March 26.
That’s the day Wall Street led the lambs to the slaughter.
To hear the Street tell it, anyone who avoided buying shares of Lyft Inc. (Nasdaq:LYFT) the day it went public was about to miss a locomotive headed out of the gate.
Turns out, nothing could have been further from the truth… folks who bought the first major U.S. ride-hailing firm to go public saw the shares quickly lose value.
It’s these very types of events that has led me to tell you folks for many years now to follow my three rules of IPO investing:
- Don’t buy a new issue at the open.
- If you are determined to do so, put in a very tight limit order so you don’t buy at the top.
- Look to get in after the lockup period ends in six months.
Thousands of investors who got caught up in the Lyft hype have seen their shares drop as much as one-third.
Ironically, I have proven you can make a lot of money in recently issued tech leaders – if you have the right stock picker in your corner.
And today, I’m going to show you just how to do that with an investment that has beaten the broader market by 68.8%…
Why I Believe in IPOs
I’m a big believer in IPOs. One of the main reasons why Silicon Valley can bring us a steady stream of innovations is the opportunity for entrepreneurs to go from early stage startups to publicly traded firms in just a few years.
Bull markets run on fresh cash, and nothing brings money in quite like exciting IPOs.
But Lyft serves as a cautionary tale. See, Lyft had so much buzz and saw so much demand going into the debut that it was able to ask $72 a share at the open, the highest for an IPO this year.
That was almost twice as much as the offering price for Facebook Inc. (Nasdaq:FB) when it went public almost five years ago to the day.
One of the reasons for the Lyft mania has to do with the fact that the number of new issues was down in the first quarter.
IPO experts at Renaissance Capital say only 18 IPOs priced in the US in the period. That ranks as the lowest number in three years. Dollar volume also was off 69.8% from the year-ago quarter, coming in at $4.7 billion.
Now you know why members of my monthly newsletter cleaned up on a couple of recent IPOs. We bought best of breed companies after the six-month lockup ended.
See, after the lockup expires, insiders can cash out, an event that often drives IPO stocks down in value until they regain their footing.
Members of my Nova-X Report made some of their better gains recently on an IPO leader, defined as a stock that had been trading for less than two years when we bought it.
This savvy firm embeds communications apps for clients. It’s up more than 390% on the half-stake we still hold, after selling the other half for 100% gains.
But don’t worry. If you’re not ready to step up to a paid membership, even one as reasonably priced as Nova-X, I have another investment in mind for you.
Spreading Out The Risk, Grabbing The Reward
It’s the Renaissance IPO ETF (NYSE:IPO). Holding 70 stocks, this fund takes a very smart approach to this volatile corner of the market.
Simply put, it takes a wait-and-see approach, something most retail investors have a hard time mastering. The fund managers are select in their buys, with rules in place to keep them on track.
For instance, five business days must pass for larger new issues (such as Lyft or Uber) to have been trading. Smaller IPOs are only added during a quarterly rebalancing.
This IPO fund also hangs on for a long enough period to ensure it captures all the gains that a young and fast-growing firm can deliver. The two-year holding period helps when the newly trading firms are often eventually added to major indexes, such as the S&P 500.
Let’s be clear. While this fund brings us great exposure to market-leading tech, it also taps into dynamic firms in other sectors.
That’s a good thing. It makes this investment a great twofer, in which we round out tech, healthcare and communications with high-octane firms in energy, finance and real estate.
In fact, this fund is brimming with fast-moving leaders. Another selling point is these guys do all the heavy lifting for us – and deal with the volatility that comes with fresh IPOs.
Of course, getting under the hood of the sort of investments that can give you a very real shot at 10x plays is right in the wheel house of my Money Morning colleague, Shah Gilani.
For the past 37 years, Shah has amassed a staggering personal fortune by using a simple trading strategy most people never consider.
See, on the outside, the companies he’s looking at appear amazing. But on the inside, it’s a different story. And no one except for Shah can tell the difference. His trading strategy is giving readers a trade recommendation every single week.
What’s Under the Hood
Let’s start with Okta Inc. (Nasdaq:OKTA). It provides cloud-based security for a roster of famous clients. It’s also partnered with industry giants Amazon Web Services and Palo Alto Networks. The stock seems stable lately but has had a few big selloffs along the way.
Forms management firm DocuSign Inc. (Nasdaq:DOCU) went public a year ago. This is the go-to firm for digital document verification throughout the corporate landscape. It also is in an uptrend after declining 44% last year.
PagSeguro Digital Ltd. (NYSE:PAGS) is the Brazilian version of Square Inc. (NYSE:SQ). Its sales shot up 66% last year, and should rise another 50% this year. It provides digital payment platforms for more than four million small and medium-sized businesses across Latin America’s largest economy.
Cyber defender Zscaler Inc. (Nasdaq:ZS) is another fast-grower, on pace to boost sales more than 50% in 2019. The firm is grabbing share in markets it values at $18 billion by offering a feature-rich set of software tools.
Built for the long haul
This IPO fund is a clear play on our nation’s track record of innovation. By buying young and fast-growing firms that are disrupting their markets, it can deliver robust results year after year.
In fact, since the markets hit bottom last Dec. 24, the IPO fund is up 41.75%, beating the S&P 500 by nearly 68%.
Just as important, the fund catches the big winners without fear that you will get clobbered by getting in too early, like at the open…
This is the kind of ETF you want to hold for the long haul.
Doing so let’s you and tap in on the steady stream of new innovations embedded in IPOs. And it gives you a vehicle for doing so that’ll help you sleep soundly.
Cheers and good investing,
Michael A. Robinson