Should You Buy Financial Engines Right Now?

| March 18, 2010 | 0 Comments

The struggling IPO market got a big boost this week.  Financial Engines (NASDAQ: FNGN), an investment advisory and asset management firm, soared in its opening debut.

It was the hottest IPO in six months.

The shares gained 44% in their first day of trading!

Here’s what happened…

On Tuesday, the company issued 10.6 million shares at $12 per share.  The stock opened at $15 and traded as high as $17.36 before closing at $17.25.  And, nearly 10 million shares traded hands.  (Investors are clearly scrambling to get their hands on shares of FNGN.)

The question on everyone’s minds now is, “Should I buy FNGN at these prices?”

That’s a great question.

But, before I give you my answer, let me tell you a little bit about the company.

FNGN has an elite heritage.

The company was co-founded by William Sharpe, winner of the 1990 Nobel Prize in Economics.  Sharpe is also the developer of the Sharpe ratio… a measure of risk/reward used by nearly all professional investors.  (Sharpe gives the business a ton of credibility.)

Here’s what they do.

FNGN provides investment advisory services to over 760 retirement plans.  These plans have a whopping 7.4 million participants and over $500 billion in assets.  The company also manages $25.7 billion for 391,000 individual investors.

The company’s services are a big hit with customers.

FNGN locks in customers initially with multi-year contracts.  However, when the contracts expire, the vast majority of customers are renewing.  The company’s client retention rate is a mind-boggling 96%.  (Clearly, they must be doing something right.)

What I really like about FNGN is their business model.  It’s a money making machine!

The company’s fees are calculated using a percentage of the assets they’re managing.  The more assets under management… the higher the fees.

Plus, the business is scalable… this means they can add large numbers of new accounts without driving up expenses.  When you combine an increasing asset base with relatively constant expenses, you get… increasing profitability!

The key is to keep bringing in more assets.

And, FNGN has developed an ingenious way to do just that.

They’ve partnered with some of the largest 401(k) providers in the industry.  Companies like Fidelity, Vanguard, and T. Rowe Price offer FNGN’s services.  (Nothing like having industry heavyweights market your business for you.)

All you need to do is look at the company’s numbers to see that the business model is working.

Over the past five years, FNGN has steadily increased revenue each and every year.  And, last year revenue jumped an impressive 19% to $85 million.  More importantly, the company posted their first ever profit… $5.7 million.

Now, getting back to the big question… should you buy FNGN today?

The short answer is no.  You probably don’t need to chase the shares on the IPO.

You see, hot IPOs tend to generate a high level of excitement.  Investors often get caught up in the moment and feel they must buy shares right away.

But, here’s the interesting thing.

History shows investors are usually better off waiting for the excitement to wear off.  Most hot IPOs will fall below their offering price within the first three years.  And, in the currently weak IPO market, we’re seeing this happen much more quickly.

AONE shot up 50% on its IPO.  The shares priced at $13.50, opened at $17, and closed at just over $20 per share.  As you can see, the shares ultimately traded as high as $28.20… a gain of 109%… before promptly falling back to earth.

Here’s the kicker…

You can now pick up AONE for less than $15 a share.

That’s not quite below the offering price (not yet anyway).  But, it’s much cheaper than what you would have paid if you chased it on the IPO.

So, what’s an investor do?

Here’s a good strategy for buying a hot IPO.

Decide how much money you want to invest in the stock.  Use some of it… maybe half or a third… to buy some shares right away.  That way if the shares skyrocket, you’re in the game.

Then, watch the shares closely.  If they pull back, you can invest the remaining amount at a lower price.

By using this strategy, you can participate in an IPO rally and lower your overall purchase price.  Take a closer look at FNGN for your own portfolio.  And, if you decide to buy it, feel free to use my hot IPO buying strategy.

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Category: Stocks

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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