LinkedIn (NYSE: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 (NASDAQ: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 (NYSEARCA: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 (NYSE:PM), Visa (NYSE:V), General Motors (NYSE:GM), Mastercard (NYSE:MA), Covidien (NYSE:COV) and Time Warner Cable (NYSE: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 (NYSEARCA: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.