Carnivore Trading Portfolio Performance Year-To-Date: +215.99% as of 09/29/22. See disclaimer.

IPO Trading Strategy: Are IPO Stocks a Good Investment in 2021?

IPO Stock Trading with the Experts

 

We have a lot of new Carnivores joining us every day out there, and we love it! 

That means we have to make sure we continue to work on learning as much as we can.

 

One of the things that we’re particularly good at here at Carnivore is the IPO world. As a team, we are likely one of the most experienced IPO-oriented groups around. We ran the syndicate allocations when we were at big firms, and we participated in almost every IPO that came through our various firms for at least 2 decades: before and after the Crash of 2000, after 9/11, and up until just this year, when some of us were still at the big Wall Street firms. We’ve also been involved in taking companies public. Dutch has a signed picture from Ralph Lauren and the Ralph Lauren IPO prospectus framed and hanging somewhere around this place. Back when nobody knew what SaaS was, the guys at Carnivore were on the Street selling shares of the first SaaS IPO ever – Salesforce.com. Nobody thought it would work. Everyone said it was a stupid way to price software and that they would fail. Now, I think they’re a $279 billion market cap company. All of us have left those firms now and are all here at Carnivore full time, but we still have our expertise and our contacts on the Street. 

So let’s get to it: 

 

What is IPO in the Stock Market?

The initial public offering (IPO) of a company is the day that it lists on the stock exchange for the first time. The investment banks try to get a valuation that makes sense, and then they set a price that they think is fair to both the company and the buyers of the inside allocation of stock for the first day. This is a delicate balancing act and tough job for a bank, because they have two parties with opposing desires that have to come together. The company wants a stock to list at $40/share (for example) and get the richest valuation they can on the first day. The investors that will be agreeing to own the stock on that first day, they want the stock to list at $12/share knowing that it’s probably worth a ton more than that. Why? They want to see it open at like $25 or $35 and make huge bank, that’s why! 

 

So eventually, the bankers put the deal together and the parties all come together and the deal is getting ready to list and the “book” is being put together, and stock is being allocated and subscribed to, and the pricing might be around $25 for our example. Now, nobody knows how the overall Street of investors are going to react, they may hate it and there is little to no buying in the “aftermarket” on that first day, or they might find that there is huge demand and the first trade is at $28 and then it just ramps on up to $35 very quickly before it closes for the first day. Wow, everyone wins. The Company has its cash – they may have sold 30 million shares at $25, so they have their $750,000,000 in cash now in the bank. The initial investors are happy –  they bought at $25 and it closed at $35; they may or may not have sold it, and they’re in the money. 

 

Next, How Do People Make Money Trading on IPO’s? 

If you’re a preferred customer at a major firm that is part of the IPO process, then maybe you get some small amount of stock. Most of the IPO stock goes to the big funds, the hedge funds, the mutual funds, the institutional players. And they get that advantage because of all the trading business they give the firms, they get this candy and we don’t. Especially if you’re with a commission free house, nobody there gets IPO’s, but I can see a day when someone like Robin Hood or Schwab or TD Ameritrade can have enough power or influence that they can get allocations of IPO stock – but it will probably still be fractional, and not meaningful enough to make a difference in our returns. Also, the commission free houses don’t want that stock anyway since it carries more regulatory scrutiny and oversight with it – all stuff they don’t want any part of. 

 

So the way the insider makes money is that they get 10,000 shares of XYZ stock on the IPO at $20. The stock opens at $35 first trade – and the client is in the money at $15/share or $150,000 on an investment of $200,000. Nice day. Now, that client has every right to sell it. Right then and bank the profit. And we used to do that back in the day, but the bankers have gotten strict about that. If you do sell it, you’re not going to be invited into the next deal perhaps. Or they have gone even further and made you agree up front you won’t sell it, but in reality, they can’t MAKE us not sell it. We do ultimately have the right to sell if we want to. Now, to get this candy and these returns, you have to be a multi-million customer of the firm, meaning you have to have an account, say at JP Morgan Chase, and have $50 million in assets there, and you have to do a ton of trading at full commission and be paying the bank $1 million a year in fees for them to even consider giving you 10,000 shares of a hot stock, the hot candy. So the odds of that are not good for most of us, right? So we have to find another way to play. It  will never be as good as being the insider that gets the beefy allocation of the hot deal, but it is working for us.

 

What IPO Trading Strategies Does Carnivore University Teach? Third, How Can Carnivores Make Money on IPO’s if We Don’t Get “Allocations” of the Stock from Our Firms? 

This is where we have some fun, ’cause we’re doing it now. The stock goes IPO, but before it goes, we’re looking at it and deciding if it’s “our kind of company.” Is it in the right space, do they have the product or management, is this of any interest? Many are not. But, say, if it’s a cloud based software company in an interesting space, they have some size, they have great customers, then we take note. We watch the first day of trading, and even if it trades up, we can buy it, and in the right market conditions, we might see it go public at $25 to the insiders that got the allocation, it will open at $35 and trading is active. We look to see if there is a good bid under it, and then we can buy it and it might follow through to $50 or $70 or $125. 

 

IPO Trading Strategy Example: GLBE Case in Point: GLBE

We saw this go public at $25, and we bought it quickly at around $28.82, then it started spiking. And it just didn’t stop. It spiked and spiked and we ended up getting over 100% return on the stock – and that just happened this year. 

In fact, if you look at the chart below, it has all the old notes in it. And looking at it today, we see the MACD is crossing with a bullish buy signal again right now (circled in bold blue), and the stock has consolidated up here in the box and may make another run! Could break to over $100! It’s still in the uptrend, and still above the 50 days moving average – this is a trade potentially. Trader Z just logged in and said “GLBE to $90” and then hung up and sent me one of his magic charts. He speaks in staccato sentences. 

So in summary, the way we play it is to come into the aftermarket on stocks we like the profile and early trading action for – and if we’re right, we can get a screamer like GLBE and ride it, add to it on the way up, and really make some bank. These are very dangerous situations though, because they are newly trading and anything can happen. One thing we do to cover ourselves is we look at the fundamentals and such, but we also look at the banks that took them out and we know the analysts that are going to follow the stock. What happens after the IPO is that there is a 30 day period in which nobody at the bank can say anything about the company, then the analyst can render an opinion on its prospects, earnings, etc. And then of course there is the first quarterly earnings report as a public company that is coming up. Bottom line, although it isn’t said often, a banker isn’t going to take a company public when they’re about to have a horrible quarter or two! So we know that after the IPO, there are two likely good things that can happen – the analyst can come out with a great projection and rosy report on the company’s future, and the company can have  banger first quarter financial results, two things that can help drive the stock UP! And even with those things working for us, there is still no guarantee that the Street will like it – it can still get clobbered. 

 

 

IPO Trading Examples Continued

We’ve traded in a couple of these.  

  • TASK
  • TOST
  • FRSH
  • GDYN
  • CFLT

 

All of these are stocks that we entered at some point relatively soon after the IPO. Do some work on your own in these and you might find more than we have! I think Trader Z likes TASK, GDYN and CFLT a lot, but these stocks are early, and there isn’t even any 50 day moving average available on some of them since they haven’t existed in our trading world for that long! The 50 day MA doesn’t even become a thing worth watching until 120 days have passed.  Good luck! 

 

So in summary, the way we play it is to come into the aftermarket on stocks we like the profile and early trading action for – and if we’re right, we can get a screamer like GLBE and ride it, add to it on the way up, and really make some bank. These are very dangerous situations though because they are newly trading, and anything can happen, but one thing we do to cover ourselves is we look at the fundamentals and such, but we also look at the banks that took them out and we know the analysts that are going to follow the stock. What happens after the IPO is that there is a 30 day period in which nobody at the bank can say anything about the company, then the analyst can render an opinion on its prospects, earnings, etc. And then of course there is the first quarterly earnings report as a public company that is coming up. Bottom line, although it isn’t said often, a banker isn’t going to take a company public when they’re about to have a horrible quarter or two! So we know that after the IPO, there are two likely good things that can happen – the analyst can come out with a great projection and rosy report on the company’s future, and the company can have a banger first quarter financial results, two things that can help drive the stock UP! And even with those things working for us, there is still no guarantee that the Street will like it – it can still get clobbered. 

 

We’ve traded in a couple of these.  

  • TASK
  • TOST
  • FRSH
  • GDYN
  • CFLT

 

All of these are stocks that we entered at some point relatively soon after the IPO. Do some work on your own in these and you might find more than we have! I think Trader Z likes TASK, GDYN and CFLT a lot, but these stocks are early, and there isn’t even any 50 day moving average available on some of them since they haven’t existed in our trading world for that long! The 50 day MA doesn’t even become a thing worth watching until 120 days have passed really. Good luck! 

———–

MORE ON THE RECENT 2021 CROP OF IPO STOCKS

From IBD

 

Fastest-Growing IPO Stocks: 20 IPOs Expecting Up To 900% Growth In 2021

This just came out late Friday

Led by founders from Google, UPST stock joins InMode and TaskUs on this list of today’s top IPOs to watch.

Heading into the last quarter of the year, what are the best IPO stocks to buy and watch in 2021? Led by Upstart (UPST) and TaskUs (TASK), here’s a look at 20 IPOs that have debuted since 2019 and expect between 27% and up to 900% earnings growth in 2021 or their current fiscal year.

And with the stock market indexes continuing to shake off recent selling pressure, several of these top IPOs are in or new buy zones.

UPST stock, TASK stock and all the IPO stocks on this screen must:

  • Have gone public since 2019.
  • Trade 400,000+ shares per day on average
  • Expect 25% or higher EPS growth in 2021.
  • Have sales growth above 25% last quarter.
  • Earn a Composite Rating 80 or higher.

 

Take UPST stock for example. Founded in 2020 by former employees of Google, Upstart leverages cloud-based artificial intelligence (AI) to streamline affordable consumer credit while reducing the risks and costs of lending for its bank partners. The San Mateo, California-based company has already originated over $9 billion in loans with more than two-thirds fully automated.

 

In addition to the Alphabet (GOOGL) pedigree, UPST stock is boosted by analyst estimates of 900% earnings growth for the full year. The leading cloud computing and AI stock has also generated average annual sales growth of 70% over the last three years.

 

Another IPO to watch is TaskUs, which has quickly emerged as a leading Business Process Outsourcing (BPO) company. Like Upstart, TaskUs has key stock-picking traits, including the highest-possible 99 Composite Rating.

 

UPST stock (No. 3) and TASK stock (No. 6) both hail from industry groups ranking in the top 10 of the 197 groups IBD tracks.

 

IPOs On Leading Stock Lists

TASK stock and UPST stock are both on the IBD 50, while TaskUs also earns a spot on IBD Sector Leaders.

Several other top IPOs are also on IBD stock lists. InMode, Avantor, Datadog, Dlocal (DLO) and Progyny (PGNY) join Upstart and TaskUs on the IBD 50.

 

Upstart, InMode, Avantor, Doximity, Revolve, and ZIM Integrated Shipping Services (ZIM) join several others on the IPO Leaders screen.

 

Which IPO Stocks Are In Or Near A Buy Zone?

 

While many of the top IPOs, such as InMode, TaskUs and Upstart stock are extended, several others are setting up, or now in new buy zones.

Revolve, PGNY stock, Zoominfo, and Envista (NVST) fit that bill.

Mister Bonjales

Mr. Bojangles says Hello to all you new Carnivores.

Anyone that wants to connect with Donk about grilling or other BBQ and steak or cooking matters can email him at contact@carnivoretrading.com
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