IPO Investing: Patience Is A Virtue…

| June 17, 2011 | 0 Comments

IPOs are getting a lot of attention lately…

A few weeks ago it was LinkedIn (LNKD), and yesterday it was Pandora (P).  Both of these newly minted tech stocks are grabbing their fair share of the headlines.

In fact, I can’t get through the day without hearing something about these “hot IPOs”.  The talking heads on CNBC are quick to point out the potential of these “next generation tech juggernauts”.

 I hope you didn’t buy LNKD on opening day…

If you did, you’re feeling some pain in your portfolio right about now.

LNKD is currently trading around $70… down 15% from its opening day price of $83 on May 19th.

Now some may say a 15% drop isn’t a huge deal.

As you can see, many unsuspecting investors bought the stock at over $120 on the first day of trading.  In that case, they’re sitting on losses of 40%… or $50 per share… ouch.

First day Pandora investors are probably feeling a little nervous too…

The stock outperformed on its first day of trading Wednesday.  CNBC commentators were quick to point out Pandora was a “bright spot” on an otherwise gloomy trading day.

But it didn’t take long before reality set in…

Now this overpriced pile of “you know what” is dropping like a stone.

In fact, in just two days of trading, shares are already falling below the $16 IPO price.  But even worse, shares are down 50% from where unsuspecting buyers scooped them up for $25 a pop.

If you’re holding Pandora, I recommend you sell it… pronto.

Why?

I think analysts are going to start downgrading Pandora like crazy.  There’s no reason for an unprofitable company with a weak business plan to trade at such lofty levels.

In fact, one analyst has already downgraded the stock… and slapped a $5.50 price target on it.

Is there a lesson to learn here?

Buying an IPO on opening day is a bad idea.  I don’t care how exciting a company is.  There’s just too much speculation and hype on the first day of trading.

Early investors are emotional and highly likely to get burned.

Of course, there are always a few rare exceptions.  But more times than not, blindly buying IPOs on opening day will quickly decimate your portfolio.

Personally, I don’t know why investors buy into IPO hype.  Maybe it’s the constant barrage of “news” on the business channels.  Or maybe it’s the lure of buying the next “big thing” before anybody else.

Instead of jumping the gun…

Let IPOs trade for a couple weeks, if not more.

You want IPOs to establish a bit of trading history.  Find out at what price levels the stock gets strong buying interest.  And use that level as a point of reference when you finally do buy the stock.

Next time you feel like buying an IPO, try this technique.  I’ll bet you get a better entry point.  And you’ll have a much better chance of making money on the trade.

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Category: Stocks

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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