The Death of IPOs (…And How You Can Profit)
Autumn is in the air, and like any good dad, I’m trying to encourage my kids to spend more time outside.
I want them to make some great memories playing in the cool crisp weather!
This week, I told my six-year-old Caleb to shut down the iPad and go outside. “Your brain is going to turn into mush if you keep watching screens all the time!” I told him.
“Does that mean I’m going to be a zombie soon?” he asked.
Apparently, Caleb needs to watch fewer Halloween movies.
But while our neighborhood has just started putting out spooky decorations, Wall Street has been dealing with its own zombies for the last several months. They’re called IPO stocks, and many of these once-popular companies have been left for dead.
Many investors have become frustrated with these losing stocks.
But the good news is that if you know how to play the “IPO apocalypse,” you can treat yourself to some great profits from other areas of the market!
Let me show you where…
A Warning About Investing in IPOs
Coming into 2019, there was a lot of excitement over initial public offerings (IPOs) — or new stocks that were going to start trading this year.
“Unicorn” was a term used for many of these companies that were worth more than $1 billion dollars, but hadn’t yet started trading on public stock markets.
These cutting edge companies included names you’ve seen in the news lately — including Uber Inc. (UBER), WeWork (now officially WeCompany), and Slack Technologies (WORK) — just to name a few.
Unicorns were expected to be hot stocks in high demand once they started trading this year.
But as it turns out, many of the most highly anticipated IPOs have wound up being huge disappointments for investors, trading sharply lower once the stocks became public.
WeWork actually wound up being dead on arrival, failing before it could even get its stock into the hands of normal investors. Talk about morbid investment opportunity!
Hopefully, you’ve steered clear of these investment catastrophes by making smart investment decisions and focusing the bulk of your investments in companies that generate reliable earnings and pay a portion of those earnings to investors.
Of course, it’s fine to invest a portion of your capital into speculative growth stock opportunities. But you always want to have a larger portion of your investments in companies that have proven themselves to be consistent and trustworthy.
Which brings us to the positive side of this IPO crisis…
IPO Risk Drives More Capital to Profitable Companies
The terrible performance of many IPOs this year has left growth investors feeling vulnerable.
In some cases, there are giant institutions who have lost billions investing in these companies before (and after) they started trading on the U.S. stock market.
In other cases, the IPO crisis has left many patting themselves on the back for sidestepping these risks and investing in more stable companies.
Either way, the trend that I’m seeing in the market right now is for more investors to pull cash out of stocks that have great stories, but not a lot of profit. Instead, the money is flowing into stocks of companies that are generating reliable profits and paying lucrative dividends.
In particular, the capital is flowing toward “value stocks” — or stocks that are trading at a very low price compared to the annual earnings these companies report.
That trend will likely continue as we head into the end of the year.
In fact, I think it will accelerate as more investors realize that they’re not going to see huge gains from new IPO stocks. These investors will start looking for safe places to earn more reasonable returns. And that means a lot of continued demand for value stocks.
As you’re evaluating different opportunities like this to invest in, I would suggest zeroing in on a few key areas.
Retail stocks that cater to lower to middle income earners will continue to do very well. The strong job market and rising wages will keep the profits flowing for these companies. Just make sure you’re not paying too much for the most popular retail stocks.
Many industrial stocks are on sale right now thanks to concerns about manufacturing in the United States. As the trade war causes more companies to consider making things right here in the U.S., these industrial stocks could trade higher very quickly.
And consumer staples stocks still look quite attractive. These are the companies that make all the things that we buy regardless of what the economy is doing. Think about companies like Procter & Gamble (PG) and Coca-Cola (KO).
Regardless of which area you invest in, know that you’re about to get a lot of company. Because other investors are already pouring cash into these names, kicking off what should be a multi-month bull market handing you wealth, income and peace of mind.
Here’s to growing and protecting your wealth!