LinkedIn (LNKD), a social network aimed at professionals for career-oriented networking, is trading over $100 today on its IPO. The stock has rocketed from its pre-trading price of $45/share, giving it a market cap near $10 billion at current prices.
This looks to be the biggest U.S. Internet IPO since Google (GOOG) launched seven years ago. LNKD has over 100 million profiles, but the company only made a small profit in 2010 and warned it may lose money in 2011. On a personal basis, I use LinkedIn, but have never seen any compelling reason to pay for any of its services thus far.
Only a lucky (or wealthy) few get to participate in the hottest IPOs at the initial offering prices. Buying on the first trading day after such a big move is certainly a risky proposition in many cases, due to quick “flipping” and profit-taking that may occur.
There is an exchanged traded fund that buys IPOs after they have been publicly trading for seven days - First Trust U.S. IPO Index (FPX). While FPX misses out on the gains that may occur on the first trading day of a stock, it often does get the benefit of buying a new stock after the balloon has been deflated a bit.
FPX holds an IPO for 1,000 trading days, then sells - a very systemized, disciplined approach. It’s current top holdings include Philip Morris (PM), Visa (V), General Motors (GM), Mastercard (MA), Covidien (COV) and Time Warner Cable (TWC). How has this strategy worked?
Well, surprisingly to some who consider after-market IPO buying a poor strategy, FPX has outperformed the S&P 500 Index (SPY) since inception. In particular, note on the chart below how much relative outperformance FPX has garnered since the market bottom of 2009.
Click to enlarge
Based on the data, post-IPO systematic buying/selling in the manner of FPX looks to be a good way to gain leverage over the broad markets during a bull run. In a bearish period it may well underperform or lag, however.