The way things are going, initial public offerings (IPO) will have their busiest year since the financial crisis. Some of the latest names on deck to go public include popular sandwich chain Potbelly food services provider Amarak —marking its third IPO—and most recently, Hilton Worldwide.
And of course, in the social media sphere there are rumors of another IPO that will rival that of Facebook (FB): Twitter.
But the last thing you should do is buy into the hype. For the newest additions to the stock market, performance has been bumpy, to say the least, and that’s not much of a surprise. I recommended staying away from all of these IPOs when they first started lighting up the headlines, because the little guy usually finds himself on the short end of the stick when it comes to IPOs.
Far too often, these deals are structured so that insiders and backers get the best price, and then they tend to dump shares on the market after the “lock-up” period expires. That’s why you tend to see share prices fall off a cliff a few months after the IPO.
This is why I don’t recommend buying IPOs. There’s too much volatility early on, and unless you can get a sweet deal on these offerings, you’re probably going to get hosed.
If you want to get into these companies, I recommend that you come back in a year or two and then consider adding these companies. And I say that for one specific reason—earnings results.
A company needs at least four quarters’ worth of data before you can really assess if it has the growth needed to be a successful investment. And that’s what’s really hot right now—especially given that earnings season kicks off in just a few weeks.
After any major market rally like what we saw over the summer, investors take profits off the table and move them into the fundamentally strong companies they see as the next winners. This is called a “flight to quality.” Investors want to go with established companies with solid fundamentals that they can trust.
This why now is such a compelling time to be a growth investor who focuses on fundamentals.
If you’ve followed me for any length of time, you know that I follow eight key metrics that have been proven to determine the financial health of a company. I watch sales growth, operating margin growth, earnings growth, earnings momentum, earnings surprises, analyst earnings revisions, cash flow and return on equity. If your investments get passing grades in these eight areas, you can sleep easy.
I urge you to run all of your stocks through my ratings tool to see how they stack up. And you can do it for free at PortfolioGrader.com.
To get you started, go to Portfolio Grader and type in the tickers for Johnson & Johnson (JNJ), AT&T (T) and American Express (AXP). You’ll find two stocks to buy and one to sell, but you’ll have to see for yourself which is which.