Covid-19’s disruptive influence wasn’t limited to publicly traded securities already trading on the market. The schedule for initial public offerings, or IPOs, was also thrown for a loop. However, a dramatic decrease in Covid cases set the stage for a rush of new stocks.
To understand the dynamics of IPOs, I highly recommend reading books and articles on the subject by William J. O’Neil, founder of Investor’s Business Daily. Essentially, public market debuts offer the chance for significant upside because hype centers on new stocks. That’s especially the case for IPOs from companies tied to innovative solutions, like technology firms.
At the same time, they are incredibly risky. Traditionally, IPOs leave retail investors out in the cold because underwriters have limited shares to work with. They can only offer new stocks at a projected discount to select clients. These clients are almost always institutional investors, so retail buyers are left to speculate at the IPO’s open.
Recently, though, companies have sought to democratize the IPO process by acting as institutional buyers on behalf of the public. For instance, ClickIPO has grown popular by acquiring blocks of pre-IPO equity units and distributing them to interested investors. Through this process, everyday investors can acquire new stocks before they make their public market debut.
Still, unlike other market opportunities, you want to be very careful with IPOs. Sometimes, public sentiment catapults them to the moon. In other cases, the freshly-issued securities tumble with no clear indication of whether they will rise again. But if you don’t mind incredible volatility, you can throw some risk-on capital toward these new stocks.
- Robinhood (NASDAQ:HOOD)
- Duolingo (NASDAQ:DUOL)
- Alussa Energy Acquisition (NYSE:FREY)
- Krispy Kreme (NASDAQ:DNUT)
- LegalZoom (NASDAQ:LZ)
- Clear Secure (NYSE:YOU)
- Mister Car Wash (NYSE:MCW)
I’ve included some companies that have yet to hit the market and some that started trading recently. But no matter what, please perform your due diligence. With little to no trading data to work from, it’s difficult to gauge where these debutantes will head next.
New Stocks: Robinhood (HOOD)
Easily one of the most anticipated new stocks in recent memory, Robinhood announced its IPO on July 1. Shares will trade on the Nasdaq exchange under the ticker symbol “HOOD.” All eyes will be on the stock’s debut because the platform is linked to two phenomena: widespread post-Covid market speculation and meme trading.
The company also attracted a ton of controversy. Users were up in arms when Robinhood prevented trades on certain meme stocks. Additionally, the app’s gamified interface led to accusations that it was a deliberately addictive platform. Robinhood is also popular among young and inexperienced traders, which can lead to tragic consequences.
Despite these issues — some of which are disturbing — Robinhood levers significant clout. It’s ByteDance’s TikTok for Generation Z traders, and it’s difficult to imagine the enthusiasm simply fading away. While incredibly risky, I see huge upside potential for HOOD stock.
True to form, Robinhood will earmark between 20% to 35% of pre-IPO shares for its users. It’s a huge development, but again, be careful. When you’re dealing with new stocks, in many ways you’re flying blind.
Another highly anticipated IPO is Duolingo, the popular language-learning app. Offering free lessons, the platform draws in people who want to learn a new language in a fun, stress-free environment. Duolingo is one of the most-watched educational technology (or EdTech) names. Having gone through a couple lessons myself, I know firsthand what the hype is about.
Duolingo organically benefitted from the Covid-19 lockdowns. When millions of people were stuck at home, many sought to expand their cultural horizons through free language lessons. As a result, 2020 revenue came in at $162 million, up 129% year-over-year. Revenue nearly doubled in the first quarter of 2021, and net loss significantly narrowed.
Currently, we don’t know when Duolingo will trade in the public market. But based on its prospectus, the company plans to list its shares on the Nasdaq exchange under the ticker symbol, “DUOL.”
The increasing pace of globalization makes Duolingo incredibly relevant. For instance, China may eclipse the U.S. as a great economic power sooner than expected. That carries serious implications for western (particularly Anglo-American) countries that dominate international affairs. Future English-speaking generations may need to learn a second language to gain a competitive edge.
Still, Duolingo is not profitable yet. And that may play into DUOL stock’s future valuation, especially if the underlying company doesn’t provide a clear path to black ink.
New Stocks: Alussa Energy Acquisition (FREY)
Another IPO to consider is Alussa Energy Acquisition, a special purpose acquisition company (SPAC). The company provides opportunities for retail investors to participate in new stocks without being an institutional buyer. Recently, Alussa combined with clean battery solution provider FREYR.
While SPACs are controversial, they offer benefits to both regular market investors and private enterprises. On the corporate side, SPACs provide a quicker, less onerous approach to going public. On the acquisition side, they give retail investors more opportunities to participate in new stocks.
However, you must perform more due diligence with SPACs than traditional IPOs. That’s because they tend to be dilutive when they exercise warrants. Also, SPAC sponsors usually take home about 20% equity in the combined company. On top of those considerations, you must also assess the actual business opportunity.
In this case, FREYR is compelling because it specializes in next-generation lithium-ion batteries. The company’s clean and low-cost batteries can succeed in the burgeoning energy storage and electric-mobility markets.
The tech firm is also developing semi-solid batteries, which may prove to be paradigm-shattering. Nevertheless, be aware that other companies making bold claims — like QuantumScape (NYSE:QS) — have struggled to sustain investor interest.
Krispy Kreme (DNUT)
Investors had high expectations for Krispy Kreme, which went public in the last week of June. In theory, the timing couldn’t have been better for the aptly-named DNUT stock. With declining Covid case rates and many countries slowly returning to normal, DNUT stock made its debut through a fundamental tailwind.
As InvestorPlace’s Robert Lakin pointed out, this isn’t Krispy Kreme’s first visit to Wall Street. The doughnut maker was a publicly traded company until JAB Holding acquired it in 2016. Now, management is hoping the second time is the charm.
Unfortunately, DNUT stock’s debut was on the rough side. While shares enjoyed a sizable lift on opening day, they slipped 19% in the next two days. The decrease could be partially related to health concerns. Lakin wrote that the “new listing of DNUT stock comes just days after researchers reported that the rates and severity of Type 2 diabetes among U.S. children rose during the Covid-19 pandemic, possibly due to weight gain during lockdowns.”
My take is that companies will eventually want their employees to return to the office. And since Krispy Kreme is the unofficial fuel for cubicle warriors, DNUT stock can rise as businesses resume in-person work.
New Stocks: LegalZoom (LZ)
One reason institutional investors love getting a tap on the shoulder from underwriters is a phenomenon known as the IPO pop. When participants buy new stocks at a discount relative to their expected open market price, they can score a quick profit.
Thanks to companies like ClickIPO and Robinhood, which offer pre-IPO access to regular buyers, average Joe investors can also benefit from that sweet pop. Just ask those who took a swing at LegalZoom.
Unlike Krispy Kreme, LZ stock jumped substantially from its initial offering price of $28 and kept moving. By the end of the July 2 session, LZ found itself priced at 6 cents under $39. In a matter of days, early bird investors pocketed a profit of 39%. That’s not a bad start, but it could get better.
Recently, I noted that LegalZoom is best known for its personal and business documentation services, particularly those involving final arrangements. “As the world emerges from the pandemic, many people are likely to be much more cognizant of their mortality, increasing demand for wills,” I wrote.
But the company’s scope isn’t limited to morose topics. As the gig economy picks up following Covid-19, there should be greater demand for incorporation documents and related services. Naturally, this will benefit LZ stock.
Clear Secure (YOU)
Prior to my coverage of Clear Secure, I had a feeling its public market debut would be a winner among new stocks. Sure enough, the shares didn’t disappoint. Starting from its initial offering price of $31, YOU stock jumped to an eventual closing price of $40 on its first day. Shares climbed to $48 just before the July 4 weekend.
Clear Secure exemplifies the rewards of getting an IPO right. The company has the advantage of a critical business model: it provides airport security services.
After the Sep. 11, 2001 terror attack, transportation security measures became extremely strict. Thankfully, such incidents are rare. But while most travelers appreciate extra precautions, long security-based wait times actually cost the U.S. economy billions of dollars every year. Finding a way to process trusted individuals quickly could significantly boost the travel security industry.
That’s exactly what Clear Secure does. Through its subscription service, Clear Secure clients can breeze through airport security lines. Additionally, the company partners with sports facilities to allow hassle-free admissions to events — a major plus in the post-Covid world.
Be aware that the Transportation Security Administration (TSA) provides a similar (and cheaper) service called PreCheck. This could hinder YOU stock’s growth depending on economic conditions.
New Stocks: Mister Car Wash (MCW)
I’m going to end on a fun note with Mister Car Wash. In the mad scramble for IPOs that usually center on advanced technology, a car wash business seems anachronistic. I mean, the industry isn’t exactly groundbreaking. Yet as I argued in Benzinga, Mister Car Wash is basically an economic barometer:
“For instance, according to the 2015 American Housing Survey, ‘63% of all occupied housing units have a garage or carport.’ But that means more than one-third of U.S. residents do not have such access and may require car-washing services. If the economy is booming, you would reasonably expect consumers to advantage premium services, such as Mister Car Wash.”
Despite considerable efforts to go green, many American consumers still gravitate toward big SUVs. And the larger the vehicle, the more of a pain it is to wash without professional help. As long as the economy steadily recovers from the pandemic, more people will likely use car washing services and boost the profile of MCW stock.
Having said all that, if the recovery narrative doesn’t pan out as hoped, Mister Car Wash may face troubles. Cleaning your own car will be one of the easiest ways to save money. Still, enthusiasm for MCW stock has been robust. Shares are up more than 45% from its initial offering price of $15.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.