Rideshare app Lyft has belly flopped after its IPO… Here’s what greedy investors got wrong… In the mailbag: “It sickens me to hear sheeple talk about ‘living in dignity’”…
Last Friday, rideshare company Lyft (LYFT) took its shares public in an initial public offering (IPO).
The offer price was $72 a share, which gives the Uber competitor a market value of $22 billion.
That’s still well below the valuation of Uber, which is still a private company, of $120 billion.
But it makes Lyft the most valuable tech company to go public since Snap (SNAP) – the company behind teen mobile messaging app Snapchat – in March 2017.
Take a look at this chart.
Lyft (LYFT) shares soared as much as 23% after its IPO on Friday.
Since then, they’ve been heading south. From Friday’s high of nearly $89, shares are trading for $69 at writing – a 22% fall.
But despite the attention this big drop has been getting in the mainstream media, this kind of development isn’t unusual when a tech stock goes public.
That’s why, in today’s dispatch, we’re turning to our tech investing expert here at Legacy Research, Jeff Brown, for his IPO secrets.
Jeff has identified two specific windows of opportunity you can use to buy shares after an IPO at deeply discounted prices.
As you’ll learn, buying during these windows can potentially add hundreds of percentage points to your returns… while making sure you avoid the mistake overeager Lyft investors made last week.
But first, there’s a key part of Jeff’s strategy that you have to keep in mind…
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As the slump in Lyft’s share price is reminding folks, buying into hyped stocks right after their IPO can be dangerous to your wealth.
That’s why colleague Jeff Brown has outlined a better strategy for readers of our elite tech investing advisory, Exponential Tech Investor.
Jeff invests in both private (pre-IPO) and public (post-IPO) tech stocks.
As a private investor, he’s made more than 100 investments. And so far, he’s had a 95.3% success rate.
But he’s also a master at identifying the right time to invest in stocks after they IPO.
That’s how he recommended shares in mobile payments company Square (SQ). And it worked out pretty well…
Jeff added Square to the model portfolio at Exponential Tech Investor in August 2016. And he recommended readers sell in December 2017 – for a nearly 221% gain.
The reason he was able to recommend Square to his readers at such a profitable time is because he only ever considers making a move during two buying windows.
We’ll walk you through each of them in a moment. But first, a quick refresher on how the IPO process works.
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When a company decides to list its shares on a public stock exchange, it reaches out to an “underwriter” – a well-connected investment bank.
The underwriter guides the company through the process of going public. It also helps it sell and distribute its shares. Basically, the underwriter goes to other investment banks and brokerages to determine who will get first dibs on the initial batch of shares.
It’s not impossible to participate in this phase in the IPO process. But you must meet certain qualifications as an investor to get your brokerage account IPO-approved.
So for most folks, the only chance to buy a stock is after its shares have already gone public.
But as Lyft’s recent action shows, you need to time your entry carefully. And that’s where Jeff’s two windows come in.
To be clear: Jeff is not recommending Lyft right now.
But as he has been telling our Exponential Tech Investor readers, you can usually expect an initial pullback after an IPO…
Often after the initial pop of an IPO, the stock pulls back into buy range. The underwriters are done marketing it. The large insider investors who got their allocation before the IPO sell for a quick gain.
So there is often heavy selling pressure pushing down the stock price. This is typically a great window for normal investors to buy into these exciting companies.
The share price for Facebook (FB) after its IPO in May 2012 is a good example of this first window at work.
Take a look…
Facebook went public at $38 a share. After popping to $45 right after its IPO, it closed at $38.23 the first day.
Less than three weeks later, Facebook was trading at $26 a share – 32% below the IPO price.
But just like buying shares in cigarette companies can be profitable, regardless of the harm their product inflicts on their customers… buying shares in Facebook has been profitable, despite the harm it does to society.
There has been no shortage of bumps along the road. But if you picked up Facebook for $26 a share after the initial pullback, you’d be sitting on a 546% profit.
That compares with the profit of 273% you would have made if you’d bought along with the stampeding crowd at the post-IPO high of $45.
On every $10,000 invested, that’s a difference to your bottom line of $27,300 ($64,600 – $37,300 = $27,300).
Don’t be put off by the jargon. Here’s Jeff with an easy explainer…
When a stock IPOs, the company insiders – employees and early investors of the company – are bound by a “lockup” period.
During the lockup, employees and early investors are barred from selling shares. And it typically ends 180 days after the IPO date.
That’s why the weeks leading up to the expiration of a lockup period are a great opportunity to buy. Jeff again…
The market knows about this effect. It knows that once the lockup expiration happens, many early investors and employees will often sell a significant number of shares. It is the first opportunity after typically 5 to 10 years of being invested that they have a chance to take some money off the table.
As a result, a stock tends to drop – and prices go “on sale” – in the weeks leading up to the lockup expiration.
Square makes the small square-shaped credit card readers you can plug into your smartphone.
It’s also the company behind the popular Cash App mobile payment service.
The company went public in November 2015 at a share price of $9. By the end of April 2016, it was trading at $15.35. And expectations for the company were running high.
But that all changed as the clock started ticking on Square’s lockup expiration period.
Square’s lockup expired on May 17, 2016. And between its post-IPO high on April 12 and May 17, its stock dropped more than 40%.
You can see this in the chart below…
Here’s Jeff with more…
Square’s business wasn’t suddenly worth 40% less in May than it was in April – nothing material had changed. It was just the weeks leading up to the lockup expiration.
This created a fantastic opportunity for smart investors to get shares of this incredible company at about the same price as the original IPO shares.
By the end of December, Square’s stock had soared nearly 50% from its May low.
Every IPO is different. But as Jeff makes clear, if you know where the windows of opportunity regularly appear, you can often find excellent entry points after a company you’re interested in IPOs.
Just remember the following when buying stocks that have recently gone public…
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Avoid the hype. Don’t rush into a stock immediately after it IPOs.
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Instead, wait for the first buying window. This is the initial pullback after the insider investors offload their shares.
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Keep an eye out for the lockup expiration period. That’s your second chance to buy at beaten-down prices before the stock goes higher.
As regular readers know, one of the hot-button topics in the mailbag recently has been the rising popularity of socialist ideas in America.
And last Wednesday, the subject turned to Social Security and Medicare – two New Deal programs that are still with us today. Writes reader Pierrette R.:
I doubt that the majority of the elderly people in our America would view Social Security or Medicare as enforced compassion. These have been remarkably successful programs that have allowed citizens to pay into programs that have sustained them in their retirement.
This is not the coddling of unproductive members of our society, it is allowing people to live with dignity in their old age.
But not everyone sees eye to eye with Pierrette…
Herein lies the problem with both of these entitlements. People pay into a system that misuses the funds almost at will, thinking they are going to live “high on the Hog” in their retirement years. NEITHER of these programs were meant to be an only source of income and healthcare upon retirement!
They were designed to supplement your nest egg that you should have been working on so that you could live in retirement on your own terms, not sit around wringing your hands and stressing about how soon that piddling Social Security check will arrive… Or worry about how much of it you will have left after you pay for all of the crap Medicare doesn’t cover because you didn’t take care of yourself.
It sickens me to hear sheeple talk about “living in dignity” when Social Security and Medicare are their retirement plan!
– Lenny W.
Meanwhile, another reader wonders if a mixed system – elements of capitalism mixed with elements of socialism – is a better path forward…
The U.S., like Canada, has had a “mixed economy” for the wealthy for decades, probably more than a century. A Canadian politician named David Lewis nailed it in a 1972 election campaign when he called Canadian corporations “corporate welfare bums.” What’s different in the U.S. now?
Comparisons of “capitalist” vs. “socialist” economies? Why not put American exceptionalism to work finding a formula/slogan that fits people’s needs into the definition of approved theoretical economic models without unleashing pejorative labels?
Looking ahead: It’s hard to imagine a perfect system, but isn’t it possible to imagine a fairer system than the stacked-deck socialist or capitalist systems defined for us now? What systems may evolve when the expected AI revolution impacts jobs and leaves more people without traditional employment earnings? Where will support come from?
Consider [reader] Bruce A’s. proposal: “There is merit in adopting parts of each.” Then acknowledge that the current U.S. system is well underway doing that but limiting the benefits to a very few.
– David D.
Finally, another reader lays the blame for the rise of socialist thinking squarely at the feet of millennials…
Every millennial movement or direction is aimed solely at making it different from the “old guard” which is always wrong. The rise of socialism throughout the world is definitely a symptom and facet of these trends and movements. As Karl Marx directed, this starts with education, then media, and finally, the military. The first two are done, if you hadn’t noticed.
– Phillip L.
Are millennials to blame for the rise of socialism in America, as Phillip L. says? Is it possible to have a “fairer” system beyond the kind of capitalism or socialism we have right now, as David D. asks?
As always, write us at [email protected].
Until tomorrow…
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Chris Lowe
April 2, 2019
Lisbon, Portugal