The current turmoil in the stock market has diverted investor’s attention from the most lucrative period during a stock’s life. This period has created trillions across the board for millions of stock investors.
In case you have not guessed it, I am referencing IPO’s or Initial Public Offerings as being the most lucrative time in a stock’s life. Shares can explode 100’s or even 1000’s of percent in a very short time at the launch.
The unfortunate part is that most investors are precluded from getting in at the start of an IPO as brokers only allocate shares to their top and often wealthiest clients.
However, this does not lock out investors from participating in IPO’s. In fact, it’s often smart to wait for the smoke to clear prior to making an investment.
Sometimes, IPO’s explode higher on the first day then crash. Other times, the shares are overhyped and simply fail to perform as expected at the launch. It can be largely a crap shoot despite the huge potential gains.
Examples of IPO’s that took off on the first day then fizzled are theglobe.com and VA Linux. These stocks burned investors who were expecting to keep their huge initial gains.
My favorite way to invest in IPO’s is very different than most investors.
I like to search for IPO shares of company’s that flounder at first, then set up at lower than expected levels as strong buy candidates.
One example of this type of price action was Facebook (Nasdaq:FB).
Overhyped as the best stock opportunity of the century, shares plunged as soon as the IPO launched, and the shares then crashed over 50% over the next few months.
IPO buyers saw their investment destroyed. Facebook’s reputation was in a blood bath. It got so bad that investors lawsuits were instituted!
The primary issue with Facebook was that investors overpaid for the IPO shares.
However, investors who bought Facebook based on the potential of the company rather than the IPO have made a killing since the post IPO low
Facebook’s post IPO strong performance gave me the idea to search for IPO stocks that failed to live up to their original hype yet have powerful bullish reasons to purchase.
We have identified two stocks that fit the parameters of loser IPO’s but whose shares have set up to be ideal buys right now.
First, let’s talk about how to avoid getting burned buying IPO’s.
Here are 4 ways to avoid loser IPO’s:
- Be Objective
It’s easy to be taken in by the hype of IPO’s. The most critical skill in choosing IPO’s is to remain objective.
Conduct research on the company and its competitors, financing, past press releases, as well as overall industry health. This research is how you will discover if a company is being overhyped or if there is an actual opportunity in the IPO.
- Look Closely At The Underwriters
The broker or underwriter offering the IPO is critical to the success of the IPO. Sure there are exceptions, but generally well-known underwriters deal with solid IPO’s.
The reason for this is that a well-known underwriter does not want to take on the reputational risk of dealing with a fraudulent or dud IPO. They want additional business from legitimate players, therefore conduct serious due diligence for any company looking to IPO.
Mistakes are made, and often lesser known underwriters offer solid companies, so there are exceptions to every rule.
However, it is a good rule of thumb to only deal with well known and reputable underwriters.
3. Study The IPO’s Prospectus
Many traders disregard the prospectus of the IPO company. It’s often dry reading and full of financial jargon. In addition, the company itself writes it, so it may not be completely direct. However, a careful reading can identify problems and slight of hand style writing that is used to hide issues.
- Look For Problems
A positive attitude can serve you well in life. However, when it comes to choosing IPO’s being a negative skeptic can save you from loss. Look for reasons not to invest rather than invest. This mindset can tip you off to hidden problems or issues that overly optimistic will easily miss.
Always remember that IPO hype can hide many issues and it may take a critical eye to properly identify. You don’t need to be trained in forensic accounting to spot issues. Simply use common sense and if something doesn’t seem right, it probably is not.
Now that we have reviewed how to avoid IPO disasters,
Here Are 2 Crushed IPO’s Set Up As Great Buys
- TerraForm Global (Nasdaq:GLBL)
This stock IPO’d at $15.00 per share in July and shares are currently trading at below $7.00 per share!
TerraForm Global, Inc. describes itself as a holding company.
The Company owns an interest in TerraForm Global, LLC, a diversified renewable energy company that owns long-term contracted wind, solar and hydro-electric power plants.
Terra Form serves a range of utility, commercial, industrial and government customers.
Dividends are a huge attraction with the stock trading for under $7.00 per share. Currently, next year $1.30 a share in dividends are projected. In 2017, analysts are forcasting $1.50 per share dividends in 2017.
The catalyst for the dividends is 42 contracts to supply around 1.4 gigawatts (GW) of power. In addition to actively chasing additional business.
We expect this company to continue to attract interest and for shares to begin their ascent.
In addition, the dividend yield is an added bonus at such low share prices.
- Fogo De Chao (Nasdaq:FOGO)
This Brazilian steakhouse IPO has been the victim of the recent stock market meltdown. In other words, the poor performance is the result of market conditions rather than the company itself.
For those of you not familiar with the chain, Fogo de Chao, Inc. is a United States-based holding company.
The Company, through its subsidiaries, operates upscale Brazilian churrascaria steakhouses under the brand of Fogo de Chao. The Company owns 100% of Brasa (Purchaser) Inc. (Brasa Purchaser), which owns 100% of Brasa (Holdings) Inc. (Brasa Holdings). The Company operates through two segments: United States and Brazil.
It specializes in fire-roasting meats utilizing the centuries-old Southern Brazilian cooking technique of churrasco.
FOGO offers its guests a tasting menu of meats featuring up to 20 cuts, simply seasoned and fire-roasted to expose their natural flavors. The Company operates approximately 26 restaurants in the United States, 10 in Brazil and one in Mexico.
The Company operates a range of restaurant formats, including in-line and free-standing locations. Its restaurants range in size from approximately 7,000 to 16,000 square feet, with seating from 200 to 500 guests.
FOGO launched it IPO at $26.00 per share in June. The stock is currently trading around $16.00 per share. This price action burned early IPO investors. However, there are bullish catalysts at play that should lift the shares from the current depressed level.
We firmly expect lower than industry labor expenses and declining beef prices to boost the share price.
At the same time, growing consumer demand for unique dining experiences and the growing South American population in many areas of the United States will fuel the continued growth of the chain.
Add in the fact that more consumers are dining out than ever combined with climbing consumer confidence and it spells bullish times ahead.