[Editor’s Note: This article was corrected on May 26, 2019.]
The IPO market in 2019’s been a bit of a Jekyll and Hyde affair with some well-known unicorns such as Lyft (NASDAQ:LYFT) and Uber (NYSE:UBER) disappointing investors while others like PagerDuty (NYSE:PD) and Beyond Meat (NASDAQ:BYND) have exceeded investor expectations.
It’s never been easy separating the good IPOs from the bad ones. You never know how a stock is going to perform once it’s trading in the secondary markets.
However, there are two ETFs available to help investors take advantage of the IPO phenomenon on a long-term basis.
Of the two, the First Trust U.S. Equity Opportunities ETF (NYSEARCA:FPX) is the larger ETF with total net assets of $1.1 billion. However, it is the tiny Renaissance IPO ETF (NYSEARCA:IPO) at $42 million in total assets that has a more appropriate methodology for finding the best stocks to buy.
That’s because IPO primarily adds new stocks on a quarterly basis — though it can make fast-track additions if the offering is large enough as was the case with Lyft.
FPX includes eligible IPO stocks after the sixth day of trading, which means in the case of Beyond Meat, if the fund did buy the shares (which it hasn’t), it would be doing so at hugely inflated prices. It makes changes to the ETF on the third Friday of a respective quarter.
The other difference is that FPX holds for four years while IPO kicks IPO stocks out after two years. In my experience, the best time to buy IPO stocks is between 12-24 months after going public.
So, based on the holdings of IPO, I’ve selected the seven best stocks to buy for the long haul.
VICI Properties (VICI)
VICI Properties (NYSE:VICI) is a real estate investment trust that was spun off from Caesars Entertainment (NYSE:CZR) in October 2017. VICI went public on January 31, 2018, at $20 a share. Its first-day return was 4.5%. Since its IPO, VICI shares are up 11.5% through May 15.
What’s to like about the experiential and gaming real estate portfolio?
First, it has a 100% occupancy rate with its tenants (Caesars, Harrah’s, etc.) on triple-net leases. That means the tenants pay for all the upkeep on the properties. Secondly, it has a diversified group of revenue streams. Although gaming accounts for 51% of its overall revenue, it gets another 19% from hotel rooms, 18% from food and beverage, and 12% from management fees, etc.
I know what you’re thinking. VICI is the asset-heavy castoff from Caesars. Caesars keeps the operating contracts and VICI is stuck with assets that are near-impossible to convert from a casino operation should the business go sour
The fact is, VICI’s properties generate some of the highest adjusted funds from operations (AFFO) yields in real estate at 6.3%
Furthermore, it’s got excellent non-gaming external growth opportunities ahead of it to tap into an ongoing desire by consumers to spend on experiences rather than things.
Sixteen months into its IPO, it’s underperformed. That lack of performance won’t last forever. In the meantime, enjoy the 5.1% yield.
If you’re a cord cutter, you probably are familiar with Roku (NASDAQ:ROKU), the company behind the Roku Channel and its streaming platform that brings together consumers, content publishers, and advertisers for mutual benefit.
Roku went public in September 2017 at $14 a share. Its first-day return was 67.9%; its total return since its IPO is 495.3%.
I’m not usually a fan of stocks that aren’t profitable, but Roku’s got a pathway to profitability that’s sure to make IPO investors even more money than they’ve already made.
Roku makes money in three ways: advertising, licensing fees from Smart TV makers who license the Roku operating system, and from the sale of streaming players. This trifecta of growth is what’s got me so darn excited about its future.
I recently stated that an analysts prediction Roku’s stock price could triple over the next five years wasn’t as crazy as it sounded. That’s because Roku continues to grow its user base and hours streamed by 40% or more a quarter.
In my opinion, Roku’s got an excellent shot at hitting $200 within the next 2-3 years. It’s got that good a business model.
Ceridian HCM (CDAY)
Although I said in the intro that it’s virtually impossible to know how a stock’s going to perform in the secondary markets, I had a real strong feeling about Ceridian HCM (NYSE:CDAY) when it went public in April 2018 at $22 a share.
Up 41.9% in its first day of trading and 128.0% since its IPO, I recommended CDAY within a week of the human capital management software company selling shares to the public.
“Dayforce has over 3,000 customers who pay a per-employee, per month (PEPM) subscription with an initial term of 3-5 years. If the customer grows headcount, Dayforce wins,” I wrote May 7, 2018.
“Dayforce has grown its cloud revenue by more than 60% on a compounded basis over the past five years. I see it as one of the best up-and-coming stocks to own on the NYSE.”
Fast forward to the end of Ceridian’s Q1 2019 results that it released May 1, and Dayforce now has 3,851 customers, a 28% increase in less than a year. As it continues to build market share in North America and beyond, I expect its profitability will increase dramatically.
CEO David Ossip is Canadian (as am I) so I’m biased about his leadership capabilities. However, if you read up on the Toronto resident, you’ll find out he’s the real deal.
Focus Financial Partners (FOCS)
If you’ve owned shares of wealth-management consolidator Focus Financial Partners (NASDAQ:FOCS) since it went public last July at $33, I feel your pain. That’s because FOCS made 13.8% on its first day of trading but has given it all back and then some — down 3.0% in the 11 months since its IPO.
The biggest problem with consolidating independent wealth management firms is that you can pay the right price when making an acquisition but lose ground anyway due to market corrections, slowing economies, etc., which lowers the assets under management and by extension the fees you charge as a result.
Therefore, you can acquire the smartest money managers in the world, and still lose.
“Organic revenue growth(1) was 7.7%, which when compared to the prior year quarter, was impacted by the effect of the markets, primarily equities and fixed income, decline in the 2018 fourth quarter and the advanced billing structure utilized by certain of our partner firms,” Focus stated in its Q1 2019 press release.
“Based on our M&A momentum and the general recovery in the financial markets, our organic revenue growth for the second quarter of 2019 is expected to be above 10%, demonstrating the resiliency of our business model.”
I believe the consolidation of independent registered investment advisor (RIA) firms is only in the early stages. That being said, if you do buy shares in FOCS, be less concerned about M&A and more concerned about organic growth. Watch that number like a hawk.
That’s because in 3-5 years, the music will stop, and you don’t want to be left without a chair.
So many IPOs go public each year it’s hard to remember when some of the better-known issues listed their shares.
Take Dropbox (NASDAQ:DBX), the web-based cloud storage and collaboration platform. I could have sworn it was the granddaddy amongst the seven stocks I’ve recommended. No, that title goes to Roku, which went public in the fall of 2017.
Dropbox’s IPO was March 22, 2018, at $21 a share. On its first day of trading, DBX shares gained 35.6%. However, since then, investors haven’t been nearly as enthusiastic about its stock. It’s up only 8.6% in the almost 14 months it’s been trading on NASDAQ.
It’s not unusual for IPO shares to lose ground after a robust first-day return.
According to UBS head of asset allocation Jason Draho, the average first-day return is 18%, followed by six months of underperformance relative to the broader markets. Furthermore, as I often point out when discussing IPOs, you can often buy shares of an IPO for less than its original price within 12-24 months of going public.
Dropbox announced its Q1 2019 results May 9 and they were solid across the board. However, DBX dropped perilously close to falling below $21, the price at which it went public.
This is one stock where I’d buy a little now and wait to see if it falls below $21 in the next 3-6 months.
Zoom Video (ZM)
One of the Best Stocks Class of 2019, Zoom Video Communications (NASDAQ:ZM) went public on April 17 at $36 a share. It was an immediate hit with investors gaining 72.2% in its first day of trading and is up 121.6% through May 15, an annualized total return of almost 1,500%.
I had never heard of the company until I read a Yahoo Finance story by Brian Sozzi about CEO Eric Yuan. In it, he talks about how Zoom would always leave money on the table when obtaining funding from VC investors so that long-term everyone would win.
In case you’re not familiar with Zoom, it provides outstanding video conferencing technology to companies on a monthly subscription basis. The subscription economy continues to gain traction, so the IPO timing was good on Yuan’s part.
And, let’s not forget it’s one of the few Class of 2019 IPOs that makes money.
I don’t know if it’s a coincidence, but Spotify (NYSE:SPOT) went public on April 3, 2018, at $132 a share. Its first-day return was a respectable 12.9%. However, its total return through May 15 is 3.4%, 520 basis points worse than Dropbox, whose IPO was two weeks earlier.
Unless you’ve been living on Mars, you’re likely familiar with the global music streaming service. At the end of April, it announced its Q1 2019 results that included a 26% year over year increase in active monthly users to 217 million and a 32% increase in premium subscribers to 100 million. Of greater importance is the fact it generated $173 million in free cash flow, 134% higher than in the same quarter a year earlier.
While it’s best known for streaming music, it is the work it’s doing for podcasters that’s got my attention. Between launching Spotify for Podcasters last October and Soundtrap for Storytellers on May 14, the company’s capturing a potentially lucrative secondary market from its original business idea.
Like Dropbox, I see it plodding away at its business until economies of scale force investors to take notice. Until then you’re paying about the same valuation for its stock as you would have a year ago, but you’re getting a much stronger company from a financial perspective.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.