7 laborious classes for buyers from the DoorDash and Airbnb IPOs
If you’ve just lost a ton of money in the past high profile IPOs, I have both good news and bad news.
Yes, I’m talking about DoorDash DASH (-2.43%) and Airbnb ABNB (+ 6.57%)..
Both promptly fell 20% or more from their first day highs. (Airbnb has largely recovered.) There’s a good chance many who bought it early panicked and sold after a huge hit.
The bad news here is obvious. You lost money.
The good news: you can think of it as a lesson for one of the most important classes at Market University: How to Invest in IPOs. I took this course decades ago when I started investing and I still have the class notes. I’m going to share the highlights with you now so you better understand how to beat the S&P 500 and Nasdaq with IPOs.
1. Avoid IPOs as the game is rigged
Now with so many people holding stocks in retirement accounts, the old line between Wall Street and Main Street is blurred. However, 1% of those surveyed still have a decisive advantage when it comes to going public. Investors with large accounts get a first jump in IPO allocations at the offer price. This price is almost always much lower than the first day market price for hot IPOs.
They flip those 1% on the first day for instant profits. What’s worse, they’ll sell to you if you’re the sucker who buys on the first day of trading.
The final result: Don’t be that fool. Since the game is so strong against you, don’t bother playing – at least not by buying on the open market on day one. “I say stay away from IPOs if you can’t get any shares in exchange for the offering,” said George Young, portfolio manager at Villere & Co. of New Orleans. “You’re paying more than you should.”
2. Wait until the IPOs become “Busted IPOs”.
There are some good ways to get involved in IPOs if you don’t have that 1% advantage. One of them is a “busted IPO”, in which a deal is traded below its offer price. This happens surprisingly often for two reasons.
First, IPOs – especially those in the tech space – are typically high-growth companies whose share prices have many expectations in them. Even a little stumble can shake your stocks.
This can happen even with large companies like Facebook FB, -0.43%.
Immediately after its IPO in May 2012, investors worried about Facebook’s ability to monetize its platform and manage the PC-to-mobile migration. Facebook quickly turned into a broken IPO.
That was a great buying opportunity. With the help of Tom Vandeventer from Tocqueville Opportunity Fund TOPPX + 2.36%,
I identified Facebook as a $ 22-23 purchase shortly after it went public when I was writing for another website. The stock is now up over 1,000%.
The other reason IPOs often turn into broken IPOs is because companies and their bankers decide when to go public. They choose a time that benefits them, not you, of course. They are good at making market and sector tops – by doing lots of IPOs. The result: IPOs often coincide with market or sector peaks. (The recent flurry of IPOs could tell us the market is topping right now.)
Neither DoorDash nor Airbnb are trading below their IPO price.
3. A company is not necessarily a good investment just because you like the product
You may have bought DoorDash or Airbnb on the first day because you liked the service. That is a big mistake. Yes, Peter Lynch, the long-standing Fidelity fund manager, popularized the tactic of buying from companies whose products you like.
But you also need to consider sound advice from Howard Marks, the co-founder of Oaktree Capital. He warns that second level thinking is key to investing. That means you have to think differently from everyone else. He argues that knowing that a product or service is good is not enough. You also need to know that other investors haven’t found out. Otherwise, they have already priced this in, making your insight completely meaningless.
Lynch never bought a stock just because he liked a product. That was just the starting point for further research.
4. Take the medium with a grain of salt
Journalists write to be read. No dusty academic papers for her. This is good because it motivates journalists to write on topics that they like. But it can spark “too much” interest in a topic – and encourage too many people to pile into one name at the same time.
The downside to this is that investors get frenzied and make emotional decisions about going public. Emotions are always your enemy when investing.
One way to get around this trap is to shut out the emotional stimulus. Familiarize yourself with “Hot IPO” stories or make a deal with yourself to avoid buying a stock before diving in. “Hot IPO” stores are here to stay. It is up to you to use discipline here.
5. Go with the lesser known names
If you have industry knowledge or talent for analyzing companies (or know someone who does), getting involved in lesser-known IPOs is worth it for two reasons. First, these IPOs are off the radar so the media hype won’t stop them.
Second, analysts in the research department of the investment banks that carried out the IPO will start reporting within a few months of the IPO – with glowing ratings, of course. This will drive investors into the stock and move it up.
This happened to me recently with the IPO of Cerevel Therapeutics CERE, + 11.81%.
The biotech company believes it knows how to optimize neural networks to treat diseases like Parkinson’s, epilepsy, anxiety, and substance abuse.
Since Cerevel ranks well in the biotech stock system that I use in my Brush Up on Stocks share letter (link in bio below), I proposed and bought Cerevel for around $ 10 in early November. Then, on new analyst coverage and the flow of news, Cerevel shares soared 80% to over $ 18.
6. Go with direct listings
Many companies avoid the IPO game by using direct listings that don’t involve investment banks. You get less money. But they get a currency for raising capital (the stock) and avoid the rigged IPO game that benefits 1%. Quality companies have done this, including Spotify SPOT, + 2.99%.
Because these stocks aren’t heavily promoted by investment bankers in pre-IPO meetings with prospective investors, they don’t show up in early trading. Analysts at brokers with banking departments who missed the fees can openly disapprove of these companies at the start of reporting and weigh on stock prices.
You should consider these direct listing companies as they get more reasonable valuations on the stock exchanges. Using this logic, I recently bought shares in technology companies Palantir Technologies PLTR (+ 5.05%) and Asana ASAN (+ 3.95%) and proposed them in my share letter in early November. They did pretty well at 35% to 80%.
This does not mean that all direct listing companies are good investments. You need to make sure they are decent companies or you need to trust analysis from someone who did it.
7. Wait for the blocking times to end
When companies go public, major shareholders and insiders tend to agree to avoid early selling in order to curb downward volatility. They are blocked by “lockup agreements”. Then they can be sold through “lockup releases”, usually after 90 to 120 days. This reduction in supply often leads to weak buying in recent IPOs.
You can find the publication date of the lock by looking for the words “lock” or “lock” in the prospectus.
DoorDash Lockup is first released 90 days after it goes public on December 9th or around March 9th if the stock is trading above $ 127.50. (I say around this date because insiders can be fired a few days early.) A large portion of Airbnb insiders and early investors will have to wait until two days after first quarter earnings are announced, which will happen sometime in April.
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned both PLTR and ASAN. Brush suggested FB, PLTR, ASAN in its share newsletter Brush Up on Stocks. Follow him on Twitter @mbrushstocks.
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