Just as important as what to buy is what not to buy – like DoorDash Inc. (DASH).
On December 9, 2002, it raised a whopping $3.4 billion as the stock began trading at a roughly 9.5% premium to its estimated IPO range of $90 to $95.
That gave the nation’s largest provider of food delivery services a market cap of $38.2 billion.
Then came the roller coaster ride. In less than a month, the stock price dropped roughly 26%. It rebounded sharply on January 5, rising 43.5% in just 9 days.
Folks started chasing those gains, buying high, but then were forced to sell low.
Over the next 10 weeks, DASH fell by nearly 39.5%.
At the end of all of these twists and turns, anyone who bought DASH at the IPO has nothing to show for it…other than hurt feelings and a nearly 20% loss.
I’m sharing the cautionary tale with you today because I believe we’ll see a lot more IPOs roll out in the weeks ahead. There’s no doubt that there will be a lot to avoid.
But there will be some that can make you money.
And I found a way for you to own the best of the best because they have to meet certain criteria to be included in this investment opportunity.
To make sure you avoid DASH-style turbulence but can still capitalize on the right companies to own, I’m taking all the guesswork out of everything for you.
Avoid Traps to Maximize Profits
Now then, I want to clear up something very important right off the bat.
I tell tech investors to avoid buying IPOs at the open. That’s when Wall Street and some early investors can cash out.
I usually suggest waiting six months before wading in for a very simple reason. That’s when the “lock up” period ends, allowing employees who were granted stock as compensation to sell.
Make no mistake. IPOs are vital for technology because they make the kind of financial exits entrepreneurs around the world dream about.
In other words, they play a vital role in our nation’s continued leadership in all things innovative.
I know from experience that many of you will no doubt be tempted to invest in new issues if for no other reason than the buzz they get from Wall Street and Big Media.
But rather that follow Wall Street’s buzz machine, I recommend you invest in the First Trust US Equity Opportunities ETF (FPX).
It’s a great long-term play that gives you access to the IPOs that are worth owning, as the fund’s managers have a certain set of rules for a company to be included in the holdings.
Just to be clear, this not a tech-specific ETF. The whole point of this winning fund is to capture the broad market for recently issued stocks.
But reflecting the importance that tech plays in the U.S. economy and the stock market, some 58.5% of FPX is devoted to communications, health care, and information technology.
For my money, that’s a good thing. FPX gives us a good combination of tech-centric stocks and broad diversification. With a fund that holds roughly 100 stocks, FPX also gives us access to finance, autos, retail, heavy industry, and energy – making this a great “twofer.”
To be included in the fund, a stock must have a market cap of at least $1.36 billion with the average coming in at $12.5 billion, small enough to offer lots of price appreciation but large enough to have solid volume. Take a look at some of the exciting tech names FPX holds:
- The Trade Desk Inc. (TTD) offers a broad and growing roster of ad management tools that is creating a massive wave of ad industry disruption. The firm’s clients can buy ads from more than 70 different exchanges and networks. We’re talking roughly 580 billion ad impressions and roughly 450 million devices per day across the globe. The firm can display key data analytics in clear and easy-to-understand graphics.
- Snap Inc. (SNAP) is the parent company of Snapchat. It offers a mobile app for Android and Apple Inc.’s (AAPL) iOS devices used by young people all around the globe. The firm operates a very sticky mobile-social platform. With 229 million daily users on average, the app reaches more 13 to 24-year-olds than Facebook or Instagram in the US, UK, France, Canada, and Australia.
- Etsy Inc. (ETSY) is the leader in a highly profitable e-commerce niche for arts, crafts, and handmade goods. Founded in Brooklyn in 2005, Etsy is built around the notion that the item you’re buying is unique. The firm also offers an augmented reality tool for its mobile app that lets you see what a piece of art will look like on your wall before you buy it.
- Keysight Technologies Inc. (KEYS) is helping clients prepare for the coming wireless service industry upgrade to 5G. This is a backend play on the entire sector because Keysight provides testing services for the wireless sector, among other industries. Its 32,000 customers include all top 10 telecom equipment companies, all but one of the top 25 semiconductor makers, and all but one of the 25 top telecom operators.
Depending on the time frame involved, FPX generally beats the S&P 500 handily.
Just look at what happened after last year’s bear market. From the day the market rebounded on March 23, 2020, to its recent high on February 16, the fund was up 144%, beating the broad market by 137.2%.
The long-term looks good as well. Over the past five years, it has consistently beat the S&P by roughly 46%.
Add it all up and you can see that if you invest in FPX for the long haul you will achieve financial freedom much faster than the average retail investor chasing IPOs that are not worth your hard-earned money.
In-fact, some companies are even avoiding the traditional IPO route altogether in favor of a “supercharged IPO” strategy.
I’m talking about the big deals you’re hearing in the news all the time now.
Cheers and good investing,
Michael A. Robinson