It was supposed to be one of the hottest IPOs of the year…
In late October 2015, shares of Ferrari (RACE) rolled on to the showroom floor for the first time, opening 13% higher than its offering price. It was 20 times oversubscribed. Demand was hot. More than 12 million shares traded within the first half hour of trading.
Investors were excited. Anticipation high…
Demand outweighed supply.
Small investors jumped at the chance to own a piece of the luxury carmaker… Institutions had the opportunity to sell at the day’s highs.
But as with most highly sought after IPOs, we’ve seen this move before.
Every one rushes to buy the hype.
But no one bothers to look under the hood to see what’s driving the stock higher. Few bothered to notice Ferrari’s announcement that it wasn’t looking to dramatically increase sales, which limits future growth.
Investors bought the hype and rushed in any way… chasing the $52 IPO as high as $61a share.It now trades at $47.67 a share – 22% off the IPO highs.
While there were a handful of IPOs that fared well, such as Collegium Pharmaceuticals (COLL) and Aclaris Therapeutics (ACRS), 2015 wasn’t a hot year.
Etsy (ETSY) – for example – was supposed to be another one of the hottest stocks of the year. Investors chased it to $35.74 only to watch it sink to $8.57 eight months later.
IPOs became a sucker’s bet…
The average IPO this year is down about 4% from its offering price, according to Forbes. More than 58% of new offerings are below the IPO price. Even stocks with strong debuts have struggled. Shake Shack (SHAK) for example has been nearly cut in half from $96 highs.
Other IPOs were shelved because of turbulent, volatile markets. In fact, Neiman Marcus, Univision, and Alberton’s just put IPO plans back on the shelf.
We all know there’s nothing quite like buying in on the ground floor…
The idea of getting into the next hottest trade in the world showing promise is sometimes to exciting to pass.
But there’s a much better, time-tested way to make money from IPOs…
The Morning After Syndrome…
As we’ve learned over the years, IPOs are some of the worst investments.
Institutions are allowed to buy in before the IPO while your average investor if forced to wait for the IPO to hit the market.
Then, as we often see, the average investor is stuck paying top dollar for the offering, as institutions sell at the opening day’s highs… only to leave the little guy holding the bag.
Just look at Ferrari.
With most hot IPOs, share prices rocket as soon as the market opens.
Shake Shack for example more than doubled its IPO price on its first day out, raising $105 million.
Then, as your average investor pushed into the stock on the first day of trading, institutions were busy selling… SHAK ran as high as $52.50, for example, falling to $39.30 days after IPO.
But as usual, a true buying opportunity for smaller investors emerges once the excitement fades…
Over the next year, we may see hot IPOs – and plenty of hype – from SpaceX, Pinterest, Snapchat, Spotify, and Dropbox. But consider this. Most will be hyped. Most will be oversubscribed. And many investors will attempt to chase them, only to lose money, as institutions sell at the highs.
Your best bet is to wait – patiently – for the hype and the stock to die off before buying.
Groupon (GRPN) is a great example.
It was called the next Amazon, valued at more than $12.7 billion shortly after going public.
In November 2011, the stock opened at $28 a share. It would hit an all-time high of $31.14 hours later. But we knew the stock was over-hyped, up too far, too fast.
So, we waited. A year later, the stock fell to $2.90 (where we recommended it), rebounding to $12.76… handing readers a potential to quadruple their money in months…
When it comes to IPOs, the bottom line is a simple one.
Most hot IPOs aren’t worth the hype. If you like a newly issued stock, have patience. Wait for the inevitable drop. You should be able to buy at significantly lower prices down the road.