The One (And Only) Way to Play the IPO Market

The way things are going, initial public offerings (IPO) will have their busiest year since the financial crisis. Some of the latest names on deck to go public include Chinese e-commerce giant Alibaba Group Holding, cloud storage company Box and craft supplier retailer Michael’s Companies Inc.

And of course everyone is talking about extreme sport camcorder maker GoPro (GPRO), which went public today. With 17.8 million shares of GPRO sold at $24 apiece this marks one of the largest consumer electronics IPOs in history. And by the time the closing bell rung today the stock finished up 30% for the day. If this has you kicking yourself for not buying in, I wouldn’t be so hasty.

The fact is that the last thing you should do is buy into the hype. For the newest additions to the stock market, performance has been bumpy, to say the least. Since going public in March Coupons.Com Inc. (COUP) has fallen 10%–while the S&P 500 has risen 4%. Care.com Inc. (CRCM) has plunged over 46% since its IPO in late January–compared with the broader market’s 9% rally! Not even Hilton Worldwide (HLT) has been able to beat the market, rising just 6% since December compared with the S&P 500’s 10%+ rise.

And that’s not much of a surprise. I recommended staying away from all of these IPOs when they first started lighting up the headlines, because the little guy usually finds himself on the short end of the stick when it comes to IPOs.

Far too often, these deals are structured so that insiders and backers get the best price, and then they tend to dump shares on the market after the "lock-up" period expires. That’s why you tend to see share prices fall off a cliff a few months after the IPO.

This is why I don’t recommend buying IPOs. There’s too much volatility early on, and unless you can get a sweet deal on these offerings, you’re probably going to get hosed.

If you want to get into these companies, I recommend that you come back in a year or two and then consider adding these companies. And I say that for one specific reason—earnings results.

A company needs at least four quarters’ worth of data before you can really assess if it has the growth needed to be a successful investment. And that’s what’s really hot right now—especially given that earnings season kicks off in just a few weeks.

After any major market rally like what we’ve seen over the past few months, investors take profits off the table and move them into the fundamentally strong companies they see as the next winners. This is called a "flight to quality." Investors want to go with established companies with solid fundamentals that they can trust.

This why now is such a compelling time to be a growth investor who focuses on fundamentals.

If you’ve followed me for any length of time, you know that I follow eight key metrics that have been proven to determine the financial health of a company. I watch sales growth, operating margin growth, earnings growth, earnings momentum, earnings surprises, analyst earnings revisions, cash flow and return on equity. If your investments get passing grades in these eight areas, you can sleep easy.

I urge you to run all of your stocks through my ratings tool to see how they stack up. And you can do it for free at PortfolioGrader.com. If you’re really looking to "go pro" with your investing strategy, Portfolio Grader is a great place to start, not the fickle IPO market.

Sincerely,

Signed Louis Navellier

Louis Navellier

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