Over the weekend, my friend and colleague, Director of Technology Investing Research, Alex Kagin, sent you a jam-packed update about the explosive biotech IPO market.
During this moment in history, the deployment of vaccines and new medicines is at the forefront of the world’s needs, and biotech firms are raising record amounts of money.
I’m talking about companies like Relay Therapeutics Inc. (RLAY) going public mid-July and raising $400 million in an upsized IPO.
It’s an especially big deal because today, I want to talk to you about IPOs in general, and there’s one investment opportunity in particular that I’m going to share that has a focus on go on the red-hot sectors of tech and life sciences.
I’ll have more on that in just a bit.
You see, when it comes to finding market-crushing tech stocks, I never take a leap of faith.
And neither should you.
Here’s the thing. One of the hottest ways to issue new stocks to the public asks you to do just that.
This investment is known as a special purpose acquisition company (SPAC). I believe it should be called RISK.
Let me explain. Tech companies regularly debut initial public offerings (IPOs). In fact, just last week, Barron’s reported that there have been 133 IPOs that premiered new stocks onto the U.S. market in 2020.
To make these debuts, companies hire investment bankers, go on roadshows and produce plenty of data to support their thesis.
SPACs do just the opposite. They ask you for blind acceptance. That’s because these are basically blank-check investments.
Like I said… RISK, way too much for my taste.
And yet, there is a lot of money to be made in IPOs – if you know where to look.
Now then, the interesting thing about SPACs is they’re essentially massive wads of cash lying around waiting to buy another company.
Hence the term, “blank check.”
When they initially go public, they have no history of operations. But usually, within two years, they must use the proceeds from the IPO to either acquire or merge with a target firm.
So when you invest in SPACs, it’s really like handing over a check to the “unknown” because you never really know which firm they will end up buying or merging with.
Risky? You bet.
But here’s the thing. New listings of SPACs have raised $12.1 billion in 2020 so far. I believe that’s a whole lot of heartache waiting to happen.
As I must have said a million times before, I usually recommend investors avoid buying an IPO at open. With those, stocks can surge in the first few days, only to go upside down later.
I’d go as far as to say the average retail investor should steer clear of IPOs for the first six months. After that period, insiders can flood the market with shares, often sending the stock into a tailspin.
Brand-new stocks by their very nature are volatile. But make no mistake, they are JUST as important as they are risky.
Let’s remember: Fresh cash keeps a bull market running higher.
IPOs are also a great lure for entrepreneurs with breakout tech. Simply stated, they can become millionaires in just a few short years. So, we need that incentive to keep pushing the pipeline of innovation
What we want to do is avoid Wall Street’s hype and look for an IPO vehicle with a solid track record.
IPO Driven Growth
That’s why I recommend the Renaissance IPO ETF (IPO). The ETF is run by Renaissance Capital, also known as “The IPO Expert.”
Renaissance Capital is the go-to source for IPO intelligence. So, I believe it’s smart to let them do all the heavy lifting for us. With years of experience under its belt, Renaissance keeps track of key metrics like:
- An IPO pipeline
- Specific trade dates
- Enhanced IPO profiles and
- Valuation analysis
Here’s what really got my attention…
The Renaissance IPO ETF is a great “twofer.” It has a total of 42 holdings, with a heavy leaning (66%) towards tech and life sciences. That other 34% gives us some nice diversification.
As I poured over the fund’s top 10 holdings, three really jumped out at me. Not only are they powerhouses, but they’ve only gotten stronger since the coronavirus hit.
The first is something almost everyone has used at least once this week alone. If it’s not to conduct business, then you’ve probably used it to talk with your family members and friends.
I’m talking about Zoom Video Communications Inc. (ZM), which makes up 10.6% of the ETF. Zoom has thrived in this coronavirus era, as it’s become almost a safety line for many companies to keep things “business as usual.”
And now with Americans being banned from many countries abroad, video chat may be the next best thing.
Not only has Zoom been riding the coronavirus wave, but so has Moderna Inc. (MRNA), making up 6.1% of the ETF. With global coronavirus cases surpassing 15 million, Moderna is sitting in a sweet spot, and this ETF stands to profit from it.
Datadog Inc. (DDOG) completes this trifecta. With Zoom covering connections with loved ones, and Moderna working hard on protecting our health, Datadog keeps businesses running smoothly on the backend.
Making up 4.7% of the ETF, this high-octane leader specializes in monitoring cloud applications. With millions working remotely, this is a large corporation’s dream come true.
IT teams and workers alike need to maximize network uptime. And Datadog makes that a reality with its serverless technology.
Add it all up and you can see that this is a safe and profitable way to play IPOs.
It rebounded on March 18, five days before the benchmark S&P 500 did. From then until hitting a recent high on July 20, the IPO was up 104%, a stunning 192% better than the overall market.
This is a great way to make sure you have plenty of innovation in your portfolio with an investment that should beat the market for years to come.
Cheers and good investing,
Michael A. Robinson