In the fervor of an initial public offering — an IPO — investors can easily get carried away.
After all, they are being pummeled with positive publicity by underwriters and brokers that this is it – the chance finally to buy into a latest, hot new company! But, in fact, unless one is some kind of insider or maybe a politician being bribed the first day of trading – the stock’s IPO day – is a crap shoot.
Take CRWD (Crowd Strike Holdings), which went public yesterday, as an example. The stock opened at 63.50, rose to 67, dropped to a low of 56, and closed at 58. A gambler might have a strategy to buy in during the day but at what point in that nine point chop does an investor make a safe investment? At no point.
The key to investing in IPOs is the first day’s price range but the buy comes after the first day as suggested in this post here: Buying IPOs for Dummies.
Following a “buying IPOs for dummies” strategy, CRWD is a buy on a close above 67.00 and at no other time. That’s when the initial fervor is over and there may be a worthwhile chance to profit going forward. Otherwise, the stock could drop through the low like LYFT did this year and keep on falling. Everyone who bought LYFT on its first day is losing money but those who did not buy are not.
How has this strategy worked this year so far?
With several companies, just great! SOLY is up 217%, SWAV is up 90%, BYND is up 86%, ZM is up 45% (see the charts below).
PINS is included here as an example of how defense can be played by both the long-term investors and swing traders. PINS rose 29% before falling back below the high of its IPO day for a loss of .9%. Disappointing for the investor, yes, but not catastrophic. Along the way, a trader might pay closer attention – at the bottom of the first big down blue bar on the chart at the right of the chart panel below PINS still had a profit of 17.2%. That would have been a good spot to take some, if not all, off the table.
(click on chart panel for a larger view)