February 28th, 2014
by George Leong, Profit Confidential
The last big initial public offering (IPO) in this country was the debut of social media play Twitter, Inc. (NYSE/TWTR), which has returned some staggering gains for its initial investors, in spite of an extremely obscene valuation assigned by the stock market. (Read "Two More Internet Stocks to Watch.")
Yet in spite of the colossal overpricing of numerous IPOs in 2013, the market demand for new issues is insatiable. As we saw in 2013, IPOs are being driven upward by a market that's looking for growth and a buying opportunity to make some quick returns.
The current bullish sentiment towards the IPO market is not to the same scale as we witnessed back in the late 1990s, when an early allotment of shares of an IPO attracted frenzied buying and a mad dash to buy the stock, even at outrageous prices.
In the current investment climate, there are several ways of playing the IPO market if you are not one of the preferred clients (the top one percent).
When the IPO is hyped up, you should always wait for the stock to come back down after its initial surge. Do not chase hot IPOs on the first or even the second day. This is especially true in cases when the IPO is showing an extreme valuation that doesn't make sense.
Facebook, Inc. (NASDAQ/FB), for instance, traded at $45.00 on its IPO debut on May 18, 2012, but it subsequently plummeted to $18.80 on October 19, 2012. The company had more than one billion subscribers, so you knew the revenues and earnings would come once the company figured out how to monetize its user base and turn eyeballs into dollars. The company has since been able to produce a revenue model that's working. The aftermath is the stock is trading at $70.00, up 55% from the first-day high and a staggering 289% if you waited and purchased it at its subsequent low.
Another example of a star-IPO-gone-wrong was Groupon, Inc. (NASDAQ/GRPN), which traded at more than $30.00 on its November 4, 2011 debut. If you waited, just a year later on November 12, 2012, you could have purchased the stock for as low as $2.60. In this case, you would have been up 390% after the stock traded at $12.76 on September 19, 2013. Groupon fell by more than 12% last Friday after providing a soft guidance despite beating on revenues and earnings in its fourth-quarter earnings season. You could go in and buy on further weakness.
What's going to be hot this year is still anyone's guess, but technology and social media will likely continue to be a place to look for hot IPOs.
Of course, since you likely won't be able to get in at the subscribed IPO price, you should wait and buy on subsequent weakness, as in the case of Groupon and Facebook. Here are three companies that may debut this year and could be hot:
Airbnb is in the real estate sector and allows users to list and rent home-based accommodations online as an alternative to paying for hotel rooms.
A company many of you are likely familiar with is Dropbox, the online service that allows you the ability of storing files in the cloud and accessing them from anywhere you have an Internet connection.
The final potential IPO that could debut is Square, Inc.-a mobile credit card service for merchants that allows them to swipe and access credit card payment software in a mobile environment. This technology is great for businesses at trade shows or for start-ups.