If you haven't noticed, the IPO market is on fire.
As has been the case for a number of months, the most recent
crop of newly public companies are posting stellar after-market
gains. With the exception of a tepid after-market performance for
data storage firm
Violin Memory (Nasdaq: VMEM)
, the investor reception has been impressive.
September's Most Popular IPOs
Yet there are two things you should know about when it comes
to these companies. They face a potential post-trading stumble in
the weeks ahead and another in a few quarters. And they explain
why you should wait for these stocks to come back into earth
before giving them a fresh look. (And why, if you have been lucky
enough to own them from the IPO, this is a good time to
The 'Kitchen Sink' Quarter
As investment bankers help a company to go public, they impart
one simple message: Make sure you generate solid results in your
final quarter as a private company -- which investors will be
heavily scrutinizing ahead of the IPO. And deliver a great
quarter the first time around as a public company.
Another common banker refrain: You'll never get investors back
on board if you deliver lousy first-time results.
The bankers have their own selfish agenda. They've promised
the investors that bought into the IPO that they've done their
due diligence and the numbers pitched in the deal can be
As a result, these newly public companies pull out all the
stops and make sure the numbers look good. Yet that pressure to
generate great numbers in the pre- and post-IPO quarters makes it
that much harder for companies to keep it up. That's why so many
companies appear to stumble badly, only one or two quarters after
their IPO. Indeed picking up shares of a hot IPO several months
down the road, once the bad quarter is out of the way, is often
the better strategy.
Big Data vendor
Splunk (Nasdaq: SPLK)
is a great example. Though investors initially pumped up shares
of this company based on its solid long-term growth
opportunities, they abandoned ship when Splunk delivered tepid
results in the third quarter of 2012, its second quarter as a
A clear exception to this cautionary approach can be made for
companies that slump right after the IPO. Analysts tend to issue
gushing reports when the 25-day "quiet period" ends, mimicking
the bullish upside envisioned by the company's investment
bankers, which can lead to as solid pop in the stock.
Data storage firm Violin Memory is a great example. To get the
deal done, the company's bankers came up with target prices in
the low teens, nicely above the $9 offering price. (IPO buyers
need that kind of baked-in upside spelled out for them.) Well,
shares are now down below $8, yet you can expect the analysts to
simply reiterate the bankers' view that shares are worth $12 to
$14, based on peer group comparisons.
That doesn't make Violin a good investment, but it makes for a
good trade ahead of the wave of analyst "buy" ratings.
The Lockup Frenzy
The fact that 2013 has been a banner year for IPOs also means
that investors may soon start getting tripped up by the 180-day
waiting period, known as the lockup, when insiders are free to
start selling shares. That means any company that went public in
April, May or June could see significant selling pressure as we
head towards the end of the year. (That also means that these
stocks will be fresh bargains when the wave of selling ends.)
Here's a quick look at some high-profile springtime 2013 IPOs
that could take a steep hit from insider selling.
Time to Lock In Profits?
There are some very promising young companies in this group,
but this liquidity-fueled market has pushed their shares up to
levels that even the most bullish investment bankers could not
For the insiders at these companies, many of whom are now
sitting on tens of millions of dollars in paper gains, the urge
to sell could prove overwhelming. If that scenario plays out,
then these stocks should surely be on your research list for the
Risks to Consider:
These young companies haven't been public enough to establish
a solid long-term base of shareholders. They're also especially
vulnerable to a shift in market direction.
Action To Take -->
With the IPO market now on full boil, it pays to heed these
long-standing post-IPO trading practices. In many instances,
you'll be able to buy these companies at better prices after
they've gotten through this weaning phase.
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