Godaddy Inc (NYSE:GDDY), the company best known for its commercials featuring race car driver Danica Patrick, dominated headlines this week as investors flocked to buy shares during the Web hosting site’s stock market debut.
GDDY shares rose nearly 34%, and Godaddy’s value was up to $5.48 billion, including debt. However, while many in Wall Street raced to buy GDDY, they might have hit the gas too soon.
While initial public offerings are good things for the market, they’re not always a good thing for investors. Often these offerings are met with insider selling that makes owning the stock dangerous for individual investors.
Therefore, I generally recommend staying on the sidelines when an initial offering rolls into town, no matter how hot the stock is.
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.
The truth of the matter is that the stock investors like inflation; they do not like deflation. Every time the dollar rallies, it creates deflation, and that’s why we’re seeing the market pull back. As we saw on Monday, it doesn’t take long for investors to realize the benefits of deflation, and the market rights itself.
That’s exactly what we’ve seen with GoPro Inc (NASDAQ:GPRO), which had its IPO last summer. After surging during the first few months, GPRO has fallen hard. GoPro stock is down over 30% year-to-date, and GPRO is still trading at over 25 times forecasted earnings. Another red flag is that GoPro is expected to post just 4.5% earnings growth this year.
And more recently Shake Shack Inc (NYSE:SHAK) had its IPO in late January, and SHAK stock has had some pretty wild swings since then. Due to the hype surrounding the burger joint, SHAK tends to sustain steeper drops on down days for the market. For instance, SHAK was down near 4% on Wednesday, when the market had pulled back about 0.5%.
It’s important to keep stories like this in mind for future IPOs. Online marketplace Etsy, Inc. also recently announced its plan to go public next month. Etsy announced on Tuesday that it plans to raise as much as $266.7 million for its IPO and expects to sell at $14 – $16 per share.
Already, there’s plenty of buzz surrounding Etsy, with estimates that its market value could hit $1.2 billion, 52 times its adjusted earnings before EBITDA for the previous year.
Now, if that sounds too good to be true, it probably is. Many are failing to highlight the fact that while Etsy’s sales jumped $56% last year to $195.6 million, Etsy also lost $15 million. Also, of the 16.7 million shares that are set to be sold for the IPO, only 13.3 million come from Etsy, the rest will come from existing investors.
The list goes on and on, and 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. That’s what’s really hot right now — especially given that earnings season is right around the corner.
After any major market rally like what we saw at the end of last year, 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 is 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 those 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.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.