Hot IPO, SNAP, Comes Out. Time to Buy?

“Hot” IPOs like Alibaba, Twitter and Facebook are usually very emotional, much anticipated and huge financial media events.  Investors clamor for these stocks, usually throwing caution to the wind as fundamentals are trampled by greed. The media are usually camped out at the NYSE or NASDAQ with minute by minute updates as to where the stock may open.

As I have discussed over and over, emotion in investing can have a very detrimental impact on your portfolio! That’s one of the reasons I have always had a tough time advising people to buy a hot IPO on its first day of trading. My theory has always been that if a company is as good as advertised, there will be plenty of time to buy it down the road once it stabilizes, even if that means at higher prices. Of course, that strategy is irrelevant to those who just want to trade the stock for short-term gains.
With Snap (millennial social media dynamo Snapchat) coming public today, I went back and found similar, much anticipated, “hot” IPOs to show you what transpired over the coming few months. The term “hot” is subjective and I tried not to cherry pick the list, however, I am sure others can argue for inclusion of more companies. This research has absolutely nothing to do with the fundamentals of Snap, which definitely concern me, even though my daughter let me know that this is a must have app for all millennials.

With all that said, let’s take a walk down hot, tech IPO memory lane.

Square came public at the end of 2015 as stocks were trying to recover from their summer swoon. After a wild first day which saw Square’s high for the next five months, the stock traded as low as $8 before doubling. Patience was rewarded, my long-term theme.
Alibaba was the largest U.S. IPO of all-time, coming public in September 2014 to huge fanfare and expectations. I don’t recall an IPO ever getting that much media attention. I surmise that the vast majority of individual investors never heard of Alibaba until the days leading up to the offering. After another wild first day, the stock pulled back 15% for a few weeks before uncharacteristically soaring to its all-time high two months later. However, as we have seen time and time again, buying strength in IPOs was not a rewarding long-term strategy as the stock was subsequently cut in half before double bottoming in September 2015.
Twitter, another hugely popular and much anticipated IPO, also bucked the trend over the past few years. While it initially dropped 20% from its $50 first day high, that set off a very powerful rally of almost 100% to $75 before seeing the customary 60% IPO collapse to $30. End result: investors were mostly better off waiting than buying right away.

Facebook may have been the most high profile IPO since Google and had all kinds of problems right out of the gate. Talk about the epitome of what not to do! Here is one piece I did. (http://www.investfortomorrow.com/newsletter/CurrentStreet$marts20120525.pdf) As you can see, it was almost straight downhill, 60%, for four months before THE bottom was hit at $18. End result: investors were absolutely better off waiting than buying right away. Patience was rewarded.

LinkedIN is next and similar to Facebook, there was immediate and significant weakness before a good low was seen. End result: It was basically a toss up.
Just like with LinkedIN, Groupon experienced the ole buyer’s remorse right from the start with the first meaningful trough coming about a month later. End result: investors were better off waiting than buying right away.
Yelp bucked the trend somewhat with only a shallow initial pullback, but the stock didn’t escape the carnage as you can see over the first three months. End result: investors were better off waiting than buying right away. Patience was rewarded.
Zynga was just like the others with an immediate month long decline to a good trading low. End result: investors were better off buying sooner than later.
I added Google as it was before the financial crisis as well as arguably the hottest and most anticipated IPO of all-time or perhaps since Microsoft and Apple in the 1980s. This is certainly not a social media company like the others. It was also during a very different investing climate back in 2005 with vastly different results. It does not belong in the group above, but I figured I would answer the question before it was asked. End result: investors were rewarded almost immediately. The stock never returned to its first day’s or week’s range.
The moral of the story is that most of the time, investors are rewarded by having patience with hot IPOs. Personally, I would rather be late and pay up than be early and lose a lot of money.

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Alibaba, Twitter and Facebook Oh My!

“Hot” IPOs like Alibaba, Twitter and Facebook are usually very emotional, much anticipated and huge financial media events.  As I have discussed over and over, emotion in investing can have a very detrimental impact on your portfolio! I went back and found similar, much anticipated, “hot” IPOs to show you what transpired over the coming few months. The results should not be surprising.

Twitter really bucked the trend over the past few years. While it initially dropped 20% from its $50 first day high, that set off a very powerful rally of almost 100% to $75 before seeing the customary 60% IPO collapse to $30. End result: investors were mostly better off waiting than buying right away.

twtr

 

Facebook had all kinds of problems right out of the gate and you are welcome to search the archives on the blog for my very opinionated view. As you can see, it was almost straight downhill for four months before THE bottom was hit. End result: investors were absolutely better off waiting than buying right away.

fb

LinkedIN is next and similar to Facebook, there was immediate and significant weakness before a good low was seen. End result: It was basically a toss up.

lnkd

Just like with LinkedIN, Groupon experienced the ole buyer’s remorse right from the start with the first meaningful trough coming about a month later. End result: investors were better off waiting than buying right away.

grpn

Yelp bucked the trend somewhat with only a shallow initial pullback, but the stock didn’t escape the carnage as you can over the first three months. End result: investors were better off waiting than buying right away.

yelp

Zynga was just like the others with an immediate month long decline to a good trading low. End result: investors were better off buying sooner than later.

znga

Google is below and this is certainly not a social media company like the others. But at the time, it was an incredibly hot IPO. It was also during a very different investing climate back in 2005 with vastly different results. It does not belong in the group above, but I figured I would answer the question before it was asked. End result: investors were rewarded almost immediately.

goog

The moral of the story is that most times, investors are rewarded by having patience with hot IPOs. Personally, I would rather be late and pay up than be early and lose a lot of money.

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Alibaba… No Bubble to Me

With the Fed meeting, press conference and Scotland out of the way, markets turned to Alibaba’s initial public offering (IPO) to close a very busy week last Friday. Looking at possibly a record $20+ billion IPO, the money had to come from somewhere. And judging by tech stocks behavior over the prior week or so, it certainly looked like institutional investors were paring back holdings to pay for Alibaba.

The hugely anticipated IPO priced at $68 and promptly opened at $92.70. You would think the exuberance could be felt across individual investor land, but one poll I saw showed 75% of Americans had no idea what Alibaba even was. In tomorrow’s piece, I will show previous “hot” IPOs and how they fared. I vividly remember pundits calling Facebook and Twitter bubbles in tech, stocks and IPOs. How did those calls work out?

I went out for lunch with a good friend on Friday at a local popular spot. He asked what was new in the investment world, to which I replied “Alibaba!” He said, “Ali what?” My friend said he never heard of the company nor was familiar with this hot offering. This all made me very curious, so I emailed a list of random people I know to ask what they knew about Alibaba. Only 20% knew anything about it. Not a single one knew they were going public today. No one really cared.

Of course, my “research” is anything but scientific or academically meaningful, but it’s very hard for me to buy the notion of a massive bubble in stocks, tech or IPOs when the average person in my universe hasn’t a clue about what is being touted as “bubble’esque” or just like the Dotcom era. When the last tech bubble hit in 1999-2000, I couldn’t go to the gym, the golf course or even the supermarket without someone asking me about a tech stock or giving me a tip.

Today and for the most part over the past few years, on a 9:1 ratio, comments from friends who are not clients fall in the disbelief camp. Most disavow the bull market and some outright hate it. More than likely the haters are also probably sitting on a lot of cash wishing they were invested.

The disavow camp typically asks questions like, “how can the Dow be at 17,000?” or “isn’t this all smoke and mirrors from the Fed?” The bottom line is that it really doesn’t matter. Price is the final arbiter. Disavowing the bull market from 6500 to 17,000 because the Fed is operating in uncharted waters is a poor investing strategy. People forget that after stocks collapsed 89% from 1929 to 1932, they “bounced” more than 400% with the government’s very heavy hand in the mix using “extraordinary measures.”

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Beware of Most Negative Seasonals of the Year

For the past three weeks I have written about the need for a short-term pullback in stocks. I have been and remain positive on the intermediate and long-term view for the stock market. Remember, pullbacks can come by stocks going sideways for a period of time or by price declining enough to entice buyers back in. In the major indices we saw a split pullback with the Dow, S&P 500 and NASDAQ 100 going sideways while the S&P 400 and Russell 2000 declines 2.65% – 3.70%. The former indices are now sitting at fresh highs and the pullback clearly ended this past Monday.

Let me be clear; I remain positive over the intermediate and long-term. However, before you assume that stocks are going to rocket higher from here, which they may, there are still a few hurdles to overcome in the seasonality department. This week, the markets bullishly digested the Fed meeting, Janet Yellen’s news conference and the Scottish vote to leave the United Kingdom.
Alibaba came public on Friday with an article devoted below. Like previous very high profile public offerings with stocks at or close to new highs, the bears came out of the woodwork last week, predicting the perfect end of the bull market on “Baba Day”. While I completely disagree with that assessment, the stock market has entered the most negative seasonal period of the year which sounds a lot worse than it actually is.

From Friday’s up opening through September 30, no other calendar period is as negative historically than right now. But before you jump into that super bear camp, realize than seasonal trends or seasonality are nothing more than a headwind or tailwind. Markets do not reverse course simply because of seasonality. It just helps add a little energy.

Besides the specific calendar challenges, there is also an added negative that follows the September expiration of options and futures which occurred on Friday. That trend shows a headwind most of this week, but particularly earlier in the week. Finally, with stocks rallying into the Fed statement as well as after it, there is another little trend I call the “Fed Hangover” which indicates some very short-term weakness this week.

How is all this research best used? From my seat since I remain positive over the intermediate and long-term, I think it will be very instructive to see how the stock market performs through month end. If stocks can hang in and only see another mild pullback, worst case, that would reinforce the bullish case and set the stage for a run to Dow 18,000 in the fourth quarter.

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Textbook Consolidation Ends

Late last month, I wrote a piece concluding that stocks looked a bit tired at all time highs. Nothing terribly damaging, but they were in need of some rest. Routine, normal and healthy pullbacks can come in different forms. The easiest way for stocks to digest is to decline 2-5% fairly quickly, while another way is to see sideways movement with a slightly downward tilt for a period of weeks.

The Dow Jones, S&P 500 and Nasdaq 100 all saw the latter from September 3 through the 15th. The S&P 400 and Russell 2000 saw the former with modest declines of 2.65% and 3.70% respectively. With the Dow, S&P and Nasdaq 100 all hitting fresh highs, it’s very hard to argue that the recent pullback is not over. Action in the S&P 400 and Russell 2000 are definitely cause for concern with the Russell living on bull market life support now.

There have been a number of recent headwinds that will dissipate one by one through month end. Markets interpreted Janet Yellen’s announcement and press conference dovish and hawking depending on who you listen to. Yields on the five year note are up 22% over the past month while the 10 year has risen by 14%, certainly not a dovish anticipation or response. Stocks, however, are up 3%, certainly not hawkish and not only responded positively after 2pm on Fed statement day,  but also followed through the day after. With many more headwinds to overcome by month end, it will be a very bullish sign if stocks can hang in within a few percent of new highs.

With the Fed gone for now, markets are squarely focused on Alibaba’s much ballyhooed IPO set for September 19. It certainly looks like institutional investors have raised the necessary cash to fund the $20+ billion offering by selling tech stocks into the Fed meeting. Additionally, Scots head to the polls to vote on leaving the UK, a move that I believe would catastrophic for their economy.

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Headwinds Abound This Week

Almost all markets finished on a sour note last week and that spilled over to begin the new week. While I have written about stocks needing a short-term breather, I was surprised that treasury bonds could not get a lift as stocks weakened. In fact, both stocks and bonds peaked the same week, but bonds sold off more significantly, something that is unusual.

The major stock market indices certainly look like they want at least a little rally, but the bigger question is will that occur right here or perhaps after the Fed concludes their two day meeting on Wednesday at 2pm. So far, the bulls are trying to mount an attack. Investors are concerned that Yellen & Co. might strike the words “considerable period” from the statement, which would be interpreted as the Fed hiking rates sooner than the 6 months initially described by Ms. Yellen’s at her first foot in mouth chat, also known as her press conference.

Besides tomorrow’s FOMC announcement, the market has also been facing three distinct headwinds this week. First, on a calendar basis, this is a particularly weak time of year through the end of the month. Second, market sentiment into last week had become very bullish, which can signal that investors have much of their money already in the market. Historically though, sentiment impact beyond a few weeks usually requires a catalyst to get the snowball moving downhill.

Finally, the largest initial public offering of all time, Alibaba, comes to market this week. With current pricing indications, it looks like the company will raise roughly $22-24 billion. That money has to come from somewhere and it stands to reason that it’s likely coming from funds using some spare cash and selling current tech holdings.

The rest of the week is going to be action packed, but the bull market remains alive, albeit, a little wounded.

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