If all you did was look at the headlines, you’d think this is a terrible time to invest in initial public offerings (IPOs).
Just take a look at this recent riff from Forbes, “Why WeWork Won’t Work! – Hello Neumann!,” or Bloomberg’s announcement, “Endeavor Makes Last-Minute Call to Yank IPO as Conditions Sour.” Big time financial news is clearly in love with the idea that anyone getting hyped up for a big name IPO is just setting themselves up for disappointment.
On paper, that narrative makes sense.
WeWork’s attempt at an IPO saw an optimistic estimated valuation of $47 billion falling to less than $14 billion before the offering was abandoned entirely. The loss was so devastating that the CEO resigned over it.
Not only that, but Peloton Interactive Inc. (PTON) dropped 11.2% in its first day of trading on Sept. 26, a decline which, according to The Wall Street Journal, directly influenced the decision of talent firm, The Endeavor Group, to also put off its own new stock debut out of fear of poor market conditions.
But what the media isn’t telling you is that tech and life sciences firms are still IPO leaders. That segment of the market is actually doing quite well overall.
Cutting Through the News Noise
Now then, I love to remind investors that to make money from the wealth machine that is high tech, you really need to filter out the noise.
That’s become particularly important these days when you look at what’s happening with IPOs. We’ve seen some highly anticipated new issues fizzle.
Besides Peloton, which makes interactive exercise cycles, ride-sharing firms Lyft Inc. (LYFT) and Uber Technologies Inc. (UBER) also suffered declines after they went public several months ago.
Disappointments like those are the kinds of so-called “trends” that headlines writers simply love. It’s easy to pull clicks by writing sensationalist soundbites about how the mighty have fallen, but those soundbites may not actually speak for the market as a whole. Instead, let’s drill down and see what’s really going on.
The truth is that this is one of the best markets we’ve seen for new issues in quite some time, but you don’t have to take my word for it.
Dealogic says 2019 is still on track to be the biggest IPO year since 2014. The firm says companies going public in the U.S. so far this year have raised $52.7 billion. That’s the best we’ve seen since the similar period back in 2014 when American firms raised $77 billion.
Here’s the thing: IPOs present savvy tech investors with a bit of a dichotomy.
Simply stated, IPOs are one of the great drivers of innovation in this country. Silicon Valley startups are geared around a profitable exit strategy that often means issuing stock to the public.
And nothing keeps a bull market moving forward like a group of new stocks to trade. These exciting opportunities have a way of pulling fresh cash into stocks, particularly high tech.
The trouble is, in the first six months of trading, they are also very volatile equities. Most investors don’t have the discipline to put in lowball limit orders to catch IPOs when they retreat from their highs but are still young enough to start a massive run.
There is, however, a way to cash in on IPOs with an investment that beats the broad market over the long haul. It’s a great vehicle for capturing American innovation in a way that allows you to sleep calmly at night.
You Can Own the Entire IPO World in One Simple Move
Enter the First Trust US Equity Opportunities ETF (FPX). The fund’s managers say they’ve captured 85% of the value of all stocks that have gone public over the past four years.
That’s a pretty comprehensive approach that almost no retail investor can match.
Strictly speaking, FPX doesn’t specialize in new tech or life sciences stocks. Instead, it seeks to mirror the broad market for new issues.
For my money, that’s a good thing. FPX gives us a good combination of tech-centric stocks and broad diversification. That makes it a great “twofer,” in which 60% of its holdings relate to some form of tech or the life sciences.
With a fund that holds roughly 100 stocks, FPX also gives us access to finance, autos, retail, heavy industry, and energy.
The average market cap is $8.9 billion, small enough to offer lots of price appreciation but large enough to have solid volume. And the managers have been smart enough to acquire stocks at solid entry points. Take a look at some of the other exciting tech names FPX holds:
- Alcon Inc. (ALC) is the world’s largest eye-care health company, and it has a big demographic trend in its favor. Alcon estimates that five billion people could be nearsighted by 2050. That’s half the planet’s projected population. The firm is getting double-digit sales growth from emerging markets, driven by China, Brazil, and Russia – as greater affluence leads to more spending on eye care.
- Hewlett Packard Enterprise Co. (HPE) is a play on artificial intelligence (AI) and supercomputing. It’s a legacy firm that traces its roots to the original Hewlett-Packard Co. founded in Silicon Valley back in 1939. HPE is a spinoff from that firm and recently joined forces with another famous player in the field. Last May, it said that it’s buying supercomputing legend Cray. Accenture says AI-driven supercomputing will boost economic activity by $8.3 trillion in the U.S. alone by 2035.
- Okta Inc. (OKTA) provides cloud-based security for a roster of famous clients like The Western Union Co. (WU), Del Monte, and the Federal Communications Commission. It’s also partnered with industry giants Amazon Web Services (AWS) and Palo Alto Networks Inc. (PANW). It boasts a total client roster of more than 7,000 companies. They are no doubt attracted by the fact that Okta gives them access to more than 6,000 pre-built cyber integrations.
- PayPal Holdings Inc. (PYPL) is a one-stop shop for cutting-edge commerce tools, offering clients a range of payment and commerce solutions that used to be reserved for big players – like lightning-fast mobile card readers, intuitive point-of-sale systems, invoicing software, business funding, and smart analytics. In 2014, the fast-moving firm bought mobile payments app Venmo, which is popular with millennials and gives it a long-term client base.
Recently trading at around $75.50, FPX is actually priced cheaper than many of its portfolio holdings. This makes it a cost-effective way for retail investors to cash in on the strong IPO market.
Depending on the time frame involved, FPX generally beats the S&P 500 by between 15% and 40%. That’s a pretty nice premium when you consider the management fees on the fund come in just shy of 0.6%.
I also think now is a particularly good time to start building your position or adding to it if you already own FPX.
With the market in turmoil in the midst of a great economy, you can buy this winner at a nice discount.
That will give you the opportunity to beat the S&P by an even larger amount over the long haul.
Cheers and good investing,