The averageIPO is up 23.1% year-to-date...
Looking at the headlines, you wouldn't know it. Newly listed tech
stocks, such as Facebook
have grabbed the attention recently.
But these stocks priced their initial public offerings (IPOs) too
high, setting up theirshares for a steep fall once they started
trading. As a result, the shares have been some of the worst
That doesn'tmean you can't find some excellent deals by shopping
the IPOmarket . Some of the high-yield IPOs I uncovered below
racked up robust year-to-date gains of better than 30% and are
still charging ahead.
But before you reach for the latest hot high-yield IPO, you should
watch for three key inflection points that can move the price
sharply up or down: the days and weeks following the IPO launch,
the end of thequiet period , and the lock-upexpiration .
Knowing what's happening around these three periods could
potentially make you -- or save you -- a lot of money...
The IPO launch
The first day a stock goes public, its price can surge especially
if the finaloffering price is at the low end or below the
anticipated range. While the average first-day share price pop of
this year's IPOs is not the 72% of 1999, it's still a healthy 14%
gain in a single trading day.
Getting in on an IPO launch can be tricky, however. Not all IPOs
are open to the public, and unless your broker has a good
connection with the underwriters, it can be hard for investors like
us to get on the IPO list.
Not to worry. Attractively priced IPOs may continue to run up in
the days and weeks following the launch, as retail investors like
you and me get in on the action.
Northern Tier Energy (NYSE:
IPO'd on July 26. The first day the MLP started trading at $14 a
share, its priced popped just a few cents. But its units were
priced well below the $19 to $21 range announced in a press release
the week before.
When investors caught on in the weeks following the launch day, the
stock really started to gain steam. The units closed a month later
on August 31 at $18.30 per unit, handing a tidy 31% gain for anyone
with the foresight to bet on this deeply discounted IPO.
End of quiet period
If you miss the opening weeks of an IPO, you may get another chance
by buying in just before the end of the quiet period. When the
quiet period ends, usually 90 days after the IPO date, investment
houses involved in theunderwriting can issue research reports
touting the stock.
According to the Nasdaq site, Northern Tier's quiet period expired
on September 4. Not coincidently, the units jumped 9% between
September 4 and 5 to $19.90 after Barclays Capital initiated
coverage with aprice target of $20.
End of lock-up period
In contrast to the run up that can follow an IPO launch and the end
of the quiet period, the shares of a newly listed stock can sell
off at the end of the lock-up period.
Lock-ups prevent early investors and other company insiders from
flooding the market with shares immediately after the stock's IPO.
When the lock-up period ends and insiders can finally start to
unload millions of shares, the sell-off can weigh on the price.
Facebook investors know all too well that the end of the lock-up
period can be a volatile time to own newlyissued shares . FB hit
new lows, falling over 4%, a day after the first lock-up period
expired on August 15.
IPOs that survive the lock-up expiration with their share price
intact are the ones you want to watch. Their stability bodes well
for future long-term performance.
This year's crop of high-yield IPOs
With these thoughts in mind, I scanned the income university for
recent IPOs in high-yield sectors such as limited partnerships
andreal estate investment trusts (REIT).
Listed below are fifteen IPOs with projected yields of better than
5%, based on management's stateddividend rate or actual payments
As you can see from the chart below, I found six MLPs, four REITs,
two royalty trusts, onebusiness development company (
) and two common stocks.
Of the stocks listed, one of them --
Hi-Crush Partners (NYSE:
-- has a quiet expiration period coming up on Sept. 25, and could
get a lift at that time. Four of them reached the end of their
Select Income REIT (NYSE:
Home Loan Servicing Solutions (Nasdaq:
Roundy's, Inc. (NYSE:
Whiting USA Trust II (NYSE:
. Roundy's has not fared as well as the others, losing some 30% in
share value in the weeks since the lock-up period expired on August
Hi-Crush Partners, however, is especially interesting since it
could get a second pop soon after its quiet period expires on
Action to Take -->
In short, don't let the Facebook headlines fool you. This year has
been full of strong performing IPOs... and some of the best have
come from high-yield sectors like REITs, MLPs, and royalty trusts.
But IPO investing isn't for everybody. If you're a long-term
investor, you may want to consider holding off on buying any
security until the lock-up period has expired.
-- Carla Pasternak
Carla Pasternak does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.