Initial public offerings (IPOs) have always held a sort of mystique for investors.
Newly public companies hit the markets in their first days and weeks with a lot of excitement. This is because investment banks love to play up a company’s potential to generate excitement, pump up its market valuations, and earn high banking fees. And investors are always on the lookout for the next new thing.
Over the last few months, two of the most highly-anticipated IPOs took place — Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT). The events were hyped up to no end, and investors were quick to scoop up shares early.
Here comes the problem we see over and over again with IPOs … those early investors are already sitting on losses.
Those who bought Uber near its high of $45 are down 11%. But worse … anyone who bought Lyft near its high of $88.60 has a loss of 38%.
Sure, these stocks will likely come back over time. But it’s better to buy good companies after the almost inevitable post-IPO dip.
Consider Tilray (NASDAQ:TLRY), the first “pure play” marijuana-focused company to IPO on a major U.S. exchange. It had a wildly successful first month. It was one of the greatest short-term wealth creation events we’ve seen in the stock market over the past decade.
But guess what? Investors who chased Tilray stock in those early days of euphoric trading are also sitting on losses. Anyone who bought near the closing high of $148.30 is now down over 70%.
The timing is different with every IPO, but so often that initial explosion of interest dies down … and the share price falls with it. Investors often forget about the stock and move on to the next new thing.
However, if the company has a great business model that creates value, investors will eventually take notice. They will begin to accumulate shares to the point that the stock can enter a huge growth phase. And this is where the big money is made.
You can see how IPOs are tricky to invest in. There’s no question about that. I never buy a stock on the first day of trading. But that certainly does not mean that you should shy away from them altogether … especially in the growing legal marijuana industry and the increasing number of cannabis companies that are going public.
That’s why I created my Cannabis Cash Calendar.
It allows us to buy the right companies at the right time. And it allows us to benefit from one of the best wealth-creating strategies throughout history: buying early.
There is a lot of homework involved in buying stocks just after their market debut. You need in-depth research. You need comprehensive and smart analysis. And it’s crucial to get the timing right.
In my Cannabis Cash Calendar system, I look for stocks whose chart patterns typically resembles the letter “J”. This chart pattern helps us determine the right time to buy.
After opening — usually above the IPO price — a stock will fall in the following weeks before forming a base. This is the left-hand side and bottom of the J.
Once the market starts to understand the company better and the pre-IPO investors sell their positions, the stock can start to form the right-hand side of the J. This could take a few weeks to a few months.
The key is to wait for the base to be formed. As always, patience is critical.
Let me give you an example in an extremely well-known and successful company that didn’t have the best start as a newly public business — Facebook (NASDAQ:FB).
In 2012, Facebook went public amidst a great deal of fanfare. Investors got so excited over the company going public that they pushed the IPO value way over what the company’s fundamentals justified at the time. No surprise there.
In the two months after the IPO, Facebook shares fell from $38 to less than $18 – a 52% decline.
As you can see in the chart above, Facebook spent months in a “hangover phase.” The shares spent a lot of time in the $20-$25 area of the stock’s J-curve. But when the stock broke above $30 in early 2013, it was sort of a “starter’s pistol” that signaled the start of a big potential run.
And what a run it was. Facebook shares went on to gain 700% in the five years that followed.
My 5-Factor Analytical Model
Buying a newly public company at the right time is just one of five factors I look for when analyzing a potential investment. Before I ever recommend investing in an IPO, all five must be met.
That’s because when a new industry booms — when billions of dollars are up for grabs — you can be sure all kinds of people will rush into the sector and try to get their share.
You can be sure some of the folks will be smart, hardworking, and great people to invest with. You can also be sure some of these folks aren’t the kind of people you’d ever want to invite over for dinner … let alone do business with.
You can be sure there will be great businesses you can buy shares in and you can be sure there will be crappy businesses you can buy shares in.
That’s a fact of life in any industry. But this challenge is magnified in a new industry with massive potential — like the legal marijuana industry.
This is why it is critical to have an analytical model … a system … a framework for evaluating legal marijuana IPOs.
And that is why I also created a 5-Factor Analytical Model for evaluating newly public legal marijuana companies to as part of my Cannabis Cash Calendar. It helps us to uncover the absolute best businesses with the largest potential. And it helps us get a great blend of risk and reward.
If you don’t know much about the industry or some of the characteristics of marijuana IPOs, you’re probably best to avoid them. But if you do or if you team up with someone who does … they can offer some of the best opportunities in the market today.
Matthew McCall is the founder and president of Penn Financial Group, an investment advisory firm, as well as the editor of Investment Opportunities and Early Stage Investor. He has dedicated his career to getting investors into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA), +1,044% in Tesla (TSLA), +611% in Liquefied Natural Gas Limited (LNGLY), +324% in Bitcoin Services (BTSC), just to name a few. If you’re interested in making triple-digit gains from the world’s biggest investment trends BEFORE anyone else, click here to learn more about Matt McCall and his investments strategy today.