How to Become a More Profitable IPO Investor - Cabot Wealth Network

How to Become a More Profitable IPO Investor

In Energy and Income Advisor, Elliott Gue and Roger Conrad recently wrote a series of articles on Master Limited Partnership (MLP) IPOs and why they offer unique opportunities for investors.

Today, our Spotlight stock features their recommendation of a midstream energy company that went public last month.

Energy MLP IPOs have been a hot commodity in the last couple of years. Just in the past month, five MLPs have either launched or filed for IPOs.

But they aren’t the only sector that is taking advantage of the current momentum-driven markets to bring companies public. Health Care IPOs lead the way, accounting for 93 deals worth $8.1 billion, followed by Technology (48, $30.7B), Financial (31, $15.3B), Energy (28, $12.3B) and Consumer (14, $2.8B).

According to Renaissance Capital, total IPOs launched so far this year add up to 242, for a whopping $76.7 billion in stock sold.

The returns have been mixed, with Consumer IPOs gaining 38.6% so far; Business Services up 31.9%, and Capital Goods & Services posting 21.0% profits. The worst performers are IPOs in the Utilities (-9.3%) and Transportation (-4.6%) sectors.

As you can see from the following chart, in the past 12 years, IPOs—in general—have been winners for investors.

Screen Shot 2014-11-14 at 2.03.01 PM

While those returns look fantastic, not every IPO is profitable. Sure, history shows us that the folks who are lucky enough to buy companies at the IPO launch and price, can often make a killing. However, many of them also flip the shares and take their profits right away. We’re in the business of more long-term investing, looking for companies that not only can be bought at an undervalued level, but businesses that will stay the course, prospering for years. In addition to a healthy dose of skepticism when researching any new portfolio purchase, there are several more caveats that can help you become a more profitable IPO investor, including:

As I’ve written in previous articles, it pays to be wary of the hype that comes along with IPO launches. Most of the research is sourced by the IPO underwriters, who have a hefty stake in making sure the IPO price leaps out of the gate. Consequently, buyer beware. That’s one reason why it’s almost always a good idea to wait at least a few weeks prior to jumping in, as other, more objective brokerage firms may initiate coverage of the stock.

Comb through the prospectus and research the competition, as well as the industry. It’s not going to make the New York Times best-seller list, and may even put you to sleep, but the prospectus will give you detailed information about how the company is planning to spend the proceeds of the IPO; i.e., paying down debt, expansion, etc. As well, it will mention the company’s competition, most of which will have plenty of analyst coverage, so you can start your research there.

Make sure the underwriters are credible. In general, a larger brokerage firm will have more resources for research and underwriting; often, they will join with other large underwriters to issue an IPO; and collectively, they will have a significant base of clients to approach for selling the new shares. That usually means a better—and more profitable—IPO launch.

I love IPOs. They can be speculative, but they can really spice up your portfolio and boost your returns, but investors must also realize they may be volatile. Therefore, it makes sense to relegate them to a small portion of your overall holdings. And as long as you are ready and willing to do a bit of research, IPOs can be a great addition to your investing strategy.


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