Traders are still hungry of crazy IPOs. The meat-alternative producer Beyond Meat (BYND) started trading today. Its IPO was priced at $25, it opened near $45 and it finished the day at 65 after tagging 75 intraday. A small float and a good story can make wonders for nimble traders in a bull market.
On a side note, have you seen the ingredients of BYND products? Artificial coloring, tons of chemicals, in general – generic easy to copy stuff that no health-conscious person would convert to. The market can be quite irrational in a short-term perspective and BYND can easily tag $100 but over the long-term, the market is a weighing machine and BYND is one heavy vegetarian stock that is very likely to go back below its IPO placement price of $25. I have no current position in BYND.
The price action in some recent IPOs has been pretty fascinating: PINS, TW, TIGR, ZM, JMIA, etc. LYFT has been the only dud among the recent public offerings. A small float can cause a lot of troubles if the stock market enters in a pullback mode. The same IPOs that double in a week or so, can drop 50% or more just as quickly.
For those who don’t know yet, a float is the actual number of shares that is currently available for trading.
Float = Shares Outstanding – Restricted Shares.
Most insiders are restricted from selling their shares in the first six months after their company goes public. This is why many new public offerings start with a float that is a small fraction of the total outstanding shares. For example, Pinterest currently has a float of 75 million shares vs 510 million outstanding shares.
After a 24% correction in the last quarter of 2018, the Nasdaq 100 (QQQ) has fully recovered and hit new all-time highs. A new all-time high after a deep correction is not necessarily the beginning of a new bull market but here are four rules of thumb how to approach it anyway:
The strong stocks that you want to buy on a pullback, won’t pull back to the obvious levels everyone wants them to. There’s a gap and go action across the board especially after strong earnings reports. It’s smart to develop a strategy that takes this price action into account.
The biggest mistake you can make in a bull market is not being patient with your winners – don’t micromanage and overreact to every small fluctuation. Find one or two strong themes and try to ride them for as long as you can. Pullbacks in strong stocks are buying opportunities and excellent risk/reward setups during bull markets. Develop a way to take advantage of that.
Some form of diversification can be helpful in a bull market. Many people forget that bull markets are low-correlation markets of stocks which mean there are good opportunities on both the long and the short side. Not all stocks rise in a bull market at the same time. While putting all your capital into just one or two stocks can help you achieve astonishing returns if you are correct, it can also lead to not making money in a bull market. You don’t need to own 500 stocks to be diversified. 7-10 are enough to do the trick.
Bull markets often correct through sector rotations. While one leading sector pulls back 4-5%, another steps up to take its role leaving the market averages like SPY and QQQ relatively unscathed. Trying to be one step ahead of the constant sector rotation can spin your head and lead to overtrading, which can be a costly mistake. You can’t catch every single mini-rotation. Focus on making money in a couple of big trends that you have identified.
The best performing sectors after a deep market correction (like the one we had in the last quarter of 2018) are usually the ones that get hit the worst. Chinese names certainly fit that category. Most had a 50 to 90% drawdown in 2018; therefore, it should not be a big surprise that many Chinese stocks are among the best performing year-to-date.
CQQQ, which an ETF concentrated in Chinese tech stocks, is firmly back above its 50 and 200-day moving averages and with rising relative strength rating. It is setting up in a tight range near its year-to-date highs. If you look under its surface, you will notice quite a few individual Chinese stocks setting up for a potential leg higher. I highlighted a few of them for our members at Market Wisdom.
The Unicorns (Uber, Pinterest, Airbnb) are going public and people are talking about IPOs again. My rule of thumb is that if a new IPO is very popular, it will be too hard to extract money in the first few months. LYFT is the most recent example. FB was also a dud in its first few months as a public company. It didn’t start trending before it crushed earnings estimates and gapped near all-time highs. The situation in BABA was similar.
When it comes to recent IPOs is better to stick to companies most people haven’t heard off that are showing constructive price action. Timing is also very important. The two best market environments for trading recent IPOs are:
Right after a major market correction. Due to their small float, recent IPOs tend to be very volatile. They can easily go down 50% – 90% if the S&P 500 loses 10-15%. They can just as easily double and triple in the initial stages of a market recovery.
When the general market is in an uptrend and risk appetite is growing.
Here are five less-talked-about recent IPOs that are currently showing constructive price action: INSP, TENB, DOMO, EVOP, PS.