Tuesday, May 19, 2020
Just like a takeover, an IPO can be a powerful way to earn big gains in a single day.
In December of last year, for example, the average first-day return for all IPOs checked-in at an impressive 62.7%.
That’s all about to change, though. And it has nothing to do with the coronavirus.
Instead, it’s about the data.
You see, a bright red “Buyer Beware” sign is flashing right now. So if you’re considering any IPO investments this year, you need to pay attention…
Crash and Burn Rate: 70% to 80%
As I’ve written in these pages many times, share price is ultimately determined by fundamentals like earnings.
In fact, if you pull up a long-term stock chart of the S&P 500, and you plot it against S&P 500 companies’ earnings, you’ll see it’s an almost perfect correlation:
As earning rise, so do stock prices.
And actually, the performance of IPOs during the dot-com era proves the same point:
70% to 80% of companies that went public during that period were unprofitable — and 70% to 80% of those companies ended up crashing and burning.
Why bring this up now?
Because today, the percentage of unprofitable companies going public is even higher than 70% to 80%.
Take a look…
Record Territory — And It’s Bad
As you can see, we entered record territory in 2018…
More than 80% of the companies going public had negative earnings!
And since then, it’s only gotten worse.
This is one of the riskiest times in recent history to invest in IPOs.
So, before you decide to jump in, make sure to review these five hallmarks of a “worthy” IPO.
Five Hallmarks of a Worthy IPO
In the End, Fundamentals Win
One final thing to keep in mind: IPOs are just like any other investment.
While hype might carry the day temporarily, share price is ultimately determined by fundamentals.
So, after you confirm the five characteristics of a worthy IPO, take some time to dissect the underlying business. The stronger the fundamentals, the greater your profit potential.
And if you don’t have the time for that, don’t worry…
I’ll be scouring the IPO pipeline this year to alert you to any low-risk, high-reward opportunities.
Ahead of the tape,