Wait Six Months Before Buying These Stocks

On Monday, Slack Technologies announced the first big initial public offering (IPO) of 2019.

Despite its name, Slack makes a popular enterprise productivity app. The app allows coworkers to message, share files, and collaborate with each other. We even use it at PBRG headquarters to organize projects and communicate with colleagues.

As you may know, private companies hold IPOs when they’re becoming public. They do this to raise money for growth and expansion.

We don’t know how much Slack will raise from its IPO. (To date, it’s raised over $1.2 billion in private funding, according to investment analytical firm PitchBook.)

But there’s no doubt the fast-growing company will be a “hot” IPO. I’m sure investors will fight over pre-IPO shares. (And unless you’re an insider, good luck trying to get any.)

Here’s why I’m telling you about Slack today…

According to research firm Renaissance Capital, 226 private companies plan to go public in 2019. That would make this year’s IPO market the largest ever.

And these companies have a combined valuation of over $697 billion. That’s bigger than the market cap of Berkshire Hathaway, the fifth-largest U.S. company by market cap.

Now, some of you may want to invest in these names as soon as they go public. But quite often, it pays to wait. That’s because the IPO market is full of landmines for the average investor.

In today’s essay, I’ll show you how to safely navigate the IPO minefield to find money-making opportunities…

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Don’t Buy the Hype

IPOs are exciting, and you’ll hear plenty of stories about large, one-day gains. But don’t buy into the hype right away.

Facebook is a good example of why you should wait…

Connected investors (insiders) were allocated pre-IPO shares at $38 each. When the company went public on May 18, 2012, shares shot up to $45 on the first day. The smart money sold soon after.

Over the next 15 months, Facebook shares fell as low as $18—a 60% drop.

That’s a long, deep drawdown. Most investors would’ve sold for a loss rather than endure the pain of holding on that long.

(It would’ve been worth it, though. Despite last year’s crash and multiple scandals, the company now trades for about $171 per share.)

My general rule of thumb for IPOs is that if I can’t get an early allocation, I’ll wait. That’s because if you’re not an insider, you’ll likely be able to buy the IPO at a discount a few months later…

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Why You Should Wait

There’s a little loophole that the average Joe can take advantage of. It’s called the “lock-up period.”

When a company is private, a small number of insiders can buy early shares. These insiders include company executives, employees, and venture capitalists.

However, insiders are bound by a lock-up period when the company goes public. During that time, they can’t sell their private shares.

The lock-up period usually lasts about 180 days (six months) after the IPO date.

The market knows that once the lock-up period expires, insiders will sell a significant number of their shares.

Since they’ve been holding their shares for usually five to 10 years… the IPO is the first chance for them to take some money off the table.

Trust me, Wall Street knows all about this lock-up period… The smart money will sell shares soon after it ends for big gains, then buy them back when prices fall.

As you can see in the chart below, Facebook bottomed four months after its IPO. So even if you’d waited the full six months, you would’ve still gotten in 45% below the IPO…

Twilio is another example. (The company makes communications platforms used by companies like Airbnb, Lyft, and Uber.) It was one of the hottest IPOs in 2016.

Like Facebook, Twilio initially took off. But if you waited for the lock-up period to expire, you could’ve gotten in at a discount to the IPO price…

Of course, not all IPOs follow the same pattern as Facebook and Twilio. But one thing holds true: If you wait, you’ll almost always have the chance to buy an IPO at a cheaper price.

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It Pays to Be Patient

You’ll hear a lot of hype about big IPOs this year. That’s just the investment banks drumming up interest in companies that they’re underwriting. After all, they need to justify their large fees for facilitating the IPOs.

But ignore that hype. Unless you’re an insider (and chances are, you aren’t), you’ll likely end up overpaying for shares when a company goes public.

Wait for the lock-up period to expire, and you’ll see better prices in six months—even on the best-performing IPOs.

Regards,

Nick Rokke
Analyst, The Palm Beach Daily

P.S. Have you participated in an IPO before? Share your experiences—good or bad—right here…

Readers weigh in on Teeka and Nick’s recent discussion on crypto idealism versus crypto realism…

From Tom B.: Hi, Teeka and Nick. Thanks for the great discussion about crypto realism versus crypto idealism.

The biggest issue I see for realists is the ability of financial firms to “rehypothecate” the tokens they hold for their clients. In other words, allowing institutions to use tokens they custody as collateral will allow for price manipulation—like we see in commodities. Another issue I foresee for realists is that the government will designate institutions as the “official” gatekeepers of cryptos for our protection.

And I do agree with you that institutional participation will cause crypto prices to skyrocket due to easier access and positive marketing by the establishment.

From Don M.: Hi, guys… I’m definitely a crypto realist.

From Anne H.: I think that while bitcoin and blockchain are decentralized, Wall Street is needed to push prices up; on this, I agree with Teeka.

My main concern is that governments don’t like competition when it comes to money, taxation, and control. Governments control the infrastructure; therefore, all they need to do is be patient. They control the means of electrical connectivity, power sources, etc. Eventually, governments will impose their will upon crypto through these methods.

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