Big Look at IPO Business -- Trading Initial Public Offerings

When you pull back and take a historic trading look at the IPO market over decades you start to realize that initial public offerings are usually in two modes:

One, cannot give them away.

Two, feeding frenzy. 

When the IPO market is down, investment bankers are working overtime to try to push the stock out the door.

When it is up, you get phone calls from people you don't know but are the friend of a friend of a client, and they say "I hear you can get IPOs for me." When you say yes, they say "Put some in my account." 

Naturally, you ask "Don't you know what are buying?" 

The response is in the negative, the new account just wants IPOs.

That my friends is an indicator of the peak of an IPO boom.

The other indicator when deals start to come to market and drop. 

The market is in heat, booming and all of a sudden the first deal drops below the issue price. 

The smart players then avoid IPOs. 

So what is happening now? I give you the KING, plunged 16 percent in its debut last month even after pricing its shares at a discount to gaming peers. That was your first clue. 

Ally Financial Inc., the auto lender, came at $25 and dropped to $24, 

There are more signs of softness and there are one or two going to premiums still. Even if the IPO business runs into the woods, there will always be deals going to premiums. 

The problem is that you have no way to separate the good from the bad. 

In my decades of experience, the IPO market has never temporarily gone soft and then come back a month later. It is up or down and that's it. 

Imagine being stuck in an IPO that came at $25 and in just the first few days sells at $24. What do you think comes next? 

Now for you short sellers . . . . you will find underwriters bidding for large blocks of stock to keep the market artificially high as the stock trades on high volume to let you lay out large positions and the new holders can be easily discouraged if they are flippers hoping for a fast hit. When the underwriter pulls away, the bombs fall. 

We note that Wall Street is a one way street. 

For companies, if you want to win, be brave enough to file your IPO early, even if the market is soft. Then when it heats up, you go effective and sell into the feeding frenzy. 

TWTR decline - a lesson in trading

Twitter  -- TWTR -- is now $50 closing near its low, down 24%.

Chart courtesy of Stockcharts.com

As we told you earlier, the stock was overpriced.  Overpriced stocks are vulnerable to horrific down moves.

That is one big lesson here, but there is more.

The next lesson is that looking at the chart will do you no good until you have looked at the fundamentals. When you look at the fundamentals, you know the stock is overpriced. You know you are tempting fate to stay long, but you should not be long, you should be short if anything, right?

You can take a look at the news, and it tells you that TWTR beat earnings and revenue predictions, but subscriber growth shot TWTR down. 

So that lesson is overpriced stocks are vulnerable, even if they exceed earnings and revenue expectations.

The other lesson with regard to IPOs, and this is why short sellers do love them so, is that the smart company goes public when the growth curve starts to slow down. 

Growth is the hot button for IPO (and other) stocks. Investors get hypnotized by growth more than any other factor.  They buy IPOs that have histories of fast growth and prospects of more of the same. 

But as an underwriter, I tell a company not to go public until they can see that the growth is going to slow down. Why share all that tasty growth with the public?  So IPO companies, smart ones, often sell at the peak. 

Short sellers, smart ones, figure out who is peaking and who will show slowing growth in the after market, and they pick an entry point for their short sale. 

At three lessons here: (1) fundamentals over all, (2) technical or chart analysis is worthless without know which way the wind is blowing from looking at the fundamentals, (3) overpriced stocks are easily knocked down, and (4) IPO companies often go public when growth is peaking or at least slowing.  OK, that's four lessons, enjoy. 

Hope this helps you see the broader picture.