IPO Observations Part 1 | stockbee


IPO Observations Part 1

As I mentioned in my last week post about trading IPO's , that I know of traders who exclusively focus on IPO's and do very well. One of the trader has agreed to share some of her observations about IPOs. Here is the first installment:

These IPO observations relate to industry/group trends.

As you replied to someone on your blog, I agree with you 100% that industry trends are best spotted by looking at individual charts. Absolutely.

However, IPO's can provide a heads up on what to look for. It is very clear that when a large number of companies in one group start to have IPO's, that group will sooner or later (barring some extraordinary event) take off. Now I am just a housewife who did not attend the University of Chicago, but it basically boils down to "cost of capital". Assuming the ipo's are not to simply buy out private equity, companies raise money in ipo's primarily for expansion where the return will be greater than their cost of capital.

If we look back we can see that energy partnerships, Chinese companies, shippers and solars dominated the action in the last year. The "lift off" in the stocks came well after the trends in the ipo's could have been spotted. Not that one should just wily nilly buy any company in those groups, but it can give you a "heads up". I remember I made decent returns last year when the casino IPO's of GCA, FNET, LVS and WYNN were the rage. And it is also interesting that even during last year's ethanol craze there were no ethanol IPO's that I am aware of (i.e. not justified by cost of capital).

Today, a quick scan of the current crop shows several "network" names (BBND, ARUN, CAVM, LLNW, STAR, VRAZ). I don't even know what a "network" is (some I own, some I don't) but the trend is clear and is bolstered by the Juniper results the other day. On a more general "intellectual" level, the group could be from Timbuktu or making little green widgets, but whatever the group is a trader should take notice and be ready to react.

Related Post: How to trade IPO's


Silver said...

There as at least one ethanol IPO last year, Ethanex (EHNX). It's stock price has declined from $4.00 to $0.40

christmasfern said...

Add AIRV to that list of Network IPO's. I think this is very interesting stuff Pradeep. Thanks for posting this and I say thankyou to your source too for sharing.

christmasfern said...

GPRE was an ethanol IPO that doubled just before PEIX doubled.

Pradeep Bonde said...

It did not double post first day price. Her point was the ethanol IPO's never as a group rallied.

christmasfern said...

Opps i meant to write, GPRE IPO'd just before PEIX doubled, not that GPRE doubled. Yes Ethanol IPO's now look like they were cashing in on hype more then anything.

I guess that is something to keep in mind in that a group of IPO's from a specific industry may portend either a new leadership group or possibly the death of a leadership group. Like junk quality .com's at the end of the 90's bull.

I think the shippers are a great example where a bunch of high quality IPO's very quietly came out when nobody was thinking about shippers. HRZ is sortof a forgotten shipper now but it had its own rally in '06 and it was a spin off from CSX coming out at the start of October of '05 when the market was weak. So theres was a nice confluence of signals there. Plus i believe insiders bought into the IPO too. HRZ was an early headsup that the other shipping IPO's needed to be watched closely.