When a company first files with a stock exchange for an initial public offering (IPO), it can be difficult to predict how the stock will perform. This can be the fault of the company itself not being ready for full-on public trading, or it can be the fault of the exchange itself. One only has to look at how the Nasdaq bungled Facebook’s IPO – rife as it was with delays, glitches, and unfulfilled orders – to see how risky it can be to jump aboard a newly launched stock.
But there are many IPOs that are launched from a solid, well-funded foundation. IPOs, in short, that can net you great profits. As you’ll see, not all IPOs are inherently risky.
When looking for an IPO to invest in, it helps to research the company. If you’re interested in emerging technologies, that can help guide your investments if that’s the industry you’re interested in. Take 3-D printing, for example. If you’ve been following technology news, you know that 3-D printer manufacturers have been making enormous progress in terms of functionality and practicality. All indicators point to this being a very vibrant and profitable market. That’s how, after a little research into 3-D printing companies, you might have come across a new and promising company called ExOne (XONE) whose IPO was in February, selling shares at $25. They are now trading at $70 and the stock remains on a steady uptrend. Buying ExOne shares is still a solid buy these nine months later and the profit potential remains very high. One of the other major 3-D printing companies that continue to yield high stock profits is 3D Systems Corp. (DDD).
To return to IPOs, however, and to turn to a completely different sector, we have uncovered an upcoming IPO that could yield tremendous profits. The company’s name is LGI Homes Inc. (LGIH) and it has just filed for a $125 million IPO on the Nasdaq. There are a number of reasons why we like this housing development company. Besides the general recovery in the housing market and how that bodes well for housing developers in general, LGI Homes Inc. was the only major house builder the U.S. that posted revenue growth from 2006 to 2008, the time when the rest of the housing market was tanking. And it has continued to post revenue growth every year since then. This tells us a number of things: 1) it’s a well-managed company, 2) it has carved out a perfect niche for itself (it only builds homes priced between $115,000 and $260,000 in Texas, Florida, Arizona, and Georgia), and 3) it knows its business and is already well-established. Using these guidelines, we can make a firm prediction that LGIH will fare well on its IPO and any investor that gets in on the ground floor could make a very nice profit.
But don’t expect all IPOs to take off the way ExOne (and LGI Homes, we expect) did. Caution is a must when investigating upcoming IPOs. If we look at another company planning an upcoming IPO, the health care alliance Premier Inc., which boasts a network of 2,900 hospitals, 400,000 physicans, and 100,000 non-hospital health care facilities, it helps if we know something about the larger picture of health systems and health care, particularly health insurance. In this instance of Premier Inc., we know that Obamacare is right around the corner and it is too soon to say how that legislation will impact the American health care system, let alone Premier’s IPO. In this instance, we believe patience is needed to see how the stock rolls out. If it does turn out to be a winner and trends nicely upwards, you will always have the opportunity to buy stock later on and ride that wave up. Your reward may not be as great as if you had bought stock during the IPO, but if the stock fares poorly, you will have negated your losses. Premier Inc. is an example of a risky IPO.
But to return to the profitable IPOs: besides the housing sector, there seems to be a number of other industries that have thrived since their IPOs. Food companies such as Noodles & Company (NDLS) and Sprouts Farmers Market Inc. (SFM) have both seen triple digit increases in stock prices since their recent IPOs. That’s not to say that all food-related IPOs will enjoy similar success, but it’s a useful trend if you can spot it. Technological firms, as well, have been enjoying healthy IPOs, especially those specializing in cloud-based information systems.
Investing in a company during its IPO may seem like a risky venture, but if you’re averse to such risk, you probably shouldn’t be investing in the stock market anyway. But if you are ready to invest and make money and you do your homework and approach each upcoming IPO without any emotional baggage – such as, “Oh, another organic food market…I love organic food…I’ll invest in that company during its IPO!” – there is great profit potential. To return to the example of the 3-D printing company ExOne, if you had bought just 100 shares during its IPO at $25 and sold them today, you would have made a profit of $4500 in just nine months. Not bad, eh?
Of course, like I said, not all IPOs will thrive like that. But as we’ve shown in the case of the upcoming IPO of LGI Homes Inc., there are ways to make informed and, more importantly, profitable decisions.
But this advice comes with a blanket word of caution: These IPOs have done well during a long bull market. If things slip into a bear market, you’ll need to be choosier. And that’s what are ongoing commentaries will tell you about.
