Do you want to invest in IPOs, but don’t know where to start?
Then today’s essay is for you.
I’m going to show you an easy, one-click way to get in on today’s most exciting IPOs, without risking a penny in individual stocks.
An IPO, if you don’t know, stands for initial public offering. It’s when a company makes its debut on the stock market.
The best ones storm out of the gate like a thoroughbred horse. They can deliver much bigger returns, in much less time, than ordinary stocks. Just look at what Roku’s (ROKU) done lately.
Roku is cashing in on the cable “cord-cutting craze.” Its share price skyrocketed 1,021% in under two years.
Alteryx (AYX)—an analytics company—also had an incredible IPO. It’s surged 883% since going public in March 2017.
The same goes for Okta (OKTA)—an enterprise software company. OKTA has exploded 528% since it began trading in April 2017.
These stocks have destroyed the broad market. And you didn’t need a special connection to Wall Street to collect these profits. Any investor could have gotten in on these gains by simply buying the stock on the day of its IPO.
But you also could be beating the S&P 500 this year even if you never touched an individual IPO stock…
And you’ll see the “Renaissance IPO ETF.”
An ETF, if you aren’t familiar, is a fund that invests in a basket of stocks. The most popular ETF is SPY, which owns every stock in the S&P 500.
These days, there’s an ETF for practically everything. If you want to invest in cybersecurity, there’s HACK. If you want to invest in robot stocks, there’s ROBO.
There are ETFs for big stocks... small stocks... momentum stocks... “value stocks”... gold stocks... cannabis stocks... social media stocks... and pretty much everything you can think of.
The Renaissance IPO ETF, as you can guess, invests in companies that recently went public.
It holds over 60 stocks, including big winners like Roku, MongoDB (MDB), and Americold (COLD) – a company I recommended back in July.
Thanks to big rallies by these stocks and other high-flying IPOs, the Renaissance IPO ETF has gained 22% this year… beating the S&P 500’s 19% return.
This fact might surprise the average guy who watches too much financial TV.
On TV, they go on and on about the big recent IPO flops like Uber and Lyft. But as you can see from the data... you’d have made more money buying a basket of IPOs this year than in an S&P 500 index fund.
Like any ETF, the Renaissance IPO ETF invests in good and bad stocks. There’s no stock picker sorting out the good businesses from the bad. If a stock IPOs and meets Renaissance’s minimum size requirement, it goes into the ETF. No questions asked.
As you would imagine, some of its biggest holdings drag down performance.
Spotify (SPOT) is the fund’s biggest holding at 7.7%.
Now, Spotify is a music streaming company with an incredible product. But it’s been a lousy investment.
It has inched just 3% higher this year.
Elanco Animal Health Incorporated (ELAN)—a company that sells animal health products—has also acted as dead weight.
ELAN has plummeted 16% this year. As recently as 3 weeks ago, ELAN was the third-largest holding in the fund.
Uber (UBER) has dragged on the fund’s performance too. As RiskHedge readers know, Uber suffered a terrible IPO. It remains the 9th-biggest holding in the Renaissance IPO ETF.
Beyond Meat makes plant-based “meat.” If you’ve been reading my essays, you know its story well by now.
Beyond Meat achieved one of the most explosive IPOs in history. Individual investors first got a chance to buy it at around $53. It would rocket to $239 in about 3 months.
I know a few investors who made a killing with Beyond Meat. But it’s barely moved the needle for the Renaissance IPO ETF.
BYND is the 33rd-biggest holding in the fund. It accounts for less than 1% of its total holdings.
If you’ve ever seen duck hunting, you know how a shotgun works. Instead of firing one bullet, it sprays lots of tiny metal pellets across a wide area.
This boosts your chances of hitting a moving target. But it’s also imprecise.
This is how the Renaissance ETF invests in IPOs. It scatters its capital across dozens of stocks.
It doesn’t matter if a recently IPO’d business is growing, shrinking, profitable, or unprofitable.
It doesn’t matter if it sells cutting-edge software or sacks of dog food.
If a company went public recently, the IPO ETF will buy its shares.
Now, the shotgun approach works well with some markets. But it’s not the best way to invest in IPOs.
Sure... even with the drawbacks I just explained, the Renaissance IPO ETF is still beating the market this year. But it’s also leaving tons of money on the table. Imagine if it had tilted its allocation toward a few big winning IPOs... or simply excluded a few of the big losers.
If you really want to make a killing in IPOs, you need to swap the shotgun for a sniper rifle. More important, adopt a sniper’s mentality.
A good sniper is extremely selective about the shots he takes. He will hide in the grass for days, waiting for the perfect shot before pulling the trigger.
The hard truth is most IPOs don’t deserve your money. But the 1 in 5 that do can make a real difference in your financial life.
So, buying the IPO ETF is fine if you just want a taste of IPO returns. But if you’re after 5 and 10 baggers, you have to act like a sniper and target the best individual IPOs.
Don’t fall for hype: In recent years, the biggest IPOs have been the ones to avoid. Just look at how Uber, Spotify, and Lyft (LYFT) have performed.
Not even mighty Facebook (FB) could live up to its pre-IPO hype. Its share price plummeted 54% in the five months after its IPO, before it bottomed out and went on to hand out a 1,000% gain.
This didn’t happen because Facebook is a bad company. Facebook plunged because it went public at an absurd $104 billion valuation. It couldn’t live up to the initial hype.
Look out for insider selling: This is a huge red flag.
Insider selling is when a director, officer, or high-ranking executive sells their shares.
These people typically have big stakes in a company. They have the most to gain—or potentially lose—from the company going public.
If they’re dumping shares before an IPO, it shows they don’t have high hopes for the stock. Maybe they think the company’s overvalued. Or maybe there are serious problems that the public don’t know about yet.
In any case, I’ll steer clear of any IPO when an insider is dumping shares.
Talk to you next week.
Justin Spittler
Hanoi, Vietnam