When a high profile company files for its initial IPO, three things are likely: the company's stock will have a huge jump on its first day; the stock will then fall hard during the coming weeks; and finally, the stock will post massive gains from its low price. After these three events the rest depends on the company and the market's perception of the company and its future.
However, as we all know, IPOs haven't been the greatest performers over the last year. Nearly everyone is fully aware of the first two events that take place with a stock rising then falling, yet, rarely do investors notice or discuss the rise after the fall. I believe this play could be an investor's easiest and surest way to return gains in this volatile market. To better explain, I have used 4 high profile IPOs of last year and will use it to better explain what's ahead for Groupon (NASDAQ:GRPN).
Renren (RENN) began trading on May 5 and reached a high of $24, a market cap of nearly $9.5 billion. The stock has since declined, and now trades with a market cap of $1.4 billion and a price of $3.60. The stock's initial reaction was a result of optimism surrounding its striking similarities to social networking giant Facebook. However, as we've learned, there is only one Facebook. RENN operates in China, which is a growing region in one of the most populated areas of the world.
Therefore, it created a lot of excitement when the company first became public. But, as you can see in the above chart, the stock then fell hard from May 5 till June 24, by nearly 70%. However, the stock then recovered, from June 24 till July 7, to post gains of 73%. This stock was the first of the social networking IPO stocks of 2011 to trade in this manner. To better explain, let's look at a few more.
The second was perhaps the most hyped stock of the bunch, and definitely the most volatile, Linkedin (LNKD). The stock took the market by storm when it more than doubled on the day of its IPO with a mindboggling market cap of nearly $12 billion and a price of $122.70. The stock then declined by nearly 50% in approximately one month, only to recover with very strong gains. As you can see in the chart, the stock trended above $100 after its initial drop and posted gains of 75% in approximately three weeks.
There have been many analysts to warn investors of this stock because of its high valuation compared to its fundamentals. Yet, because of its fast growth, investors have ignored and have continued to buy the stock regardless of its high valuation. I'm quite pessimistic of this stock because I don't believe its growth is sustainable, and although I enjoy Linkedin much more than Facebook it doesn't appeal to the same number of consumers as Facebook. Therefore, I believe its growth will stall at some point in the future and that it will be very difficult for LNKD to maintain its growth as I consider it to be more like Myspace than Facebook.
Pandora (P) is probably my favorite of the bunch because of its lack of competition and its importance to the smartphone experience. During the company's recent success it's done a great job at capitalizing and growing off its success and I believe that Pandora could be the company to change the way we experience music for many years to come. However, much like the other stocks on this list, it's traded in the same pattern, including its large gains during its IPO. When the company became public it traded to highs of $24; however, it fell much faster than the other stocks on this list.
Within 5 days the stock had lost nearly 50% of its value, which I believe was a result of the previous trends in LNKD and RENN along with investors learning the tendencies of high profile IPO stocks. Yet, much like LNKD and RENN, the stock posted large gains to follow its initial loss, and gained 50% in just 9 days. The stock has since followed the same trend of other stocks to become public in 2011 and has posted a large amount of loss, which makes me suggest that maybe these stocks are trading more on technicals and not fundamental growth.
Much like the other three stocks on this list, Zillow has followed the same trend. It posted a high of $60 during its IPO only to fall by 60% in only one month. The stock then increased by 55% during the following 8 trading days before selling off. As a long-term investment I'm undecided on Zillow because I don't know how the company will perform once the real estate market is stable.
As of now, I believe the stock is a buy because it gives agents an edge in a competitive real estate market and the company's done a great job at growing its revenue and profit during each quarter since becoming public. And because it only has a small percentage of all listed agents in the U.S., I believe there is still room to grow. My only question is if the company can continue to grow if the real estate market improves and the need for additional marketing becomes a luxury and not a necessity.
After looking at four of the most high profile speculative IPOs, we can now focus on perhaps the most speculative high profile stock and that is Groupon. The whole purpose of identifying the trends of the four stocks above is to show similarities to Groupon. The stock reached a high of $31.14 during its IPO but has since trended lower and closed on Monday at $15.24 for a 9% loss, as most stocks were trending higher.
According to recent history this trend is normal and if this stock trades like the other four on this list then it will most likely post gains in the immediate future. Each of the stocks above lost at least 50% from their high before turning to trend higher. And since GRPN is currently trading with a 50% loss from its high, now is the time to buy. Each stock on this list returned at least 50% from its initial drop; therefore, with GRPN being the most speculative and having the most investors that are either bearish or bullish, it will most definitely post the same level of gains.
The consistency of this pattern may be the most consistent trend within the market. I have only noticed this pattern among companies that operate with an online model, through the cloud, or have a dependency on social media. This theory hasn't been as successful with established companies with less speculation such as GNC Holdings (NYSE:GNC), HCA Holdings (NYSE:HCA), or even Dunkin Brands Group (NASDAQ:DNKN). And although I'm not sure why this trend wouldn't occur within these stocks, I do have a few beliefs.
The difference between stocks such as DNKN and GRPN is the perception among investors. Dunkin is an established company with physical locations that has operated with success for many years, along with GNC. However, the new companies that have filed for IPOs over the last year such as LNKD, RENN, P, Z, and GRPN are all speculative companies with investors having strong opinions of either hating or loving the stock. There are very few in between who have neutral outlooks on these companies. As a result, I believe it creates a large amount of volatility within the stock.
Another theory is that a large number of investors purchase a speculative high profile stock the day of its IPO with no intention to hold. These investors are just buying and hoping to profit from the large gains of the IPO but have plans to sell the first chance they get. I understand this concept first hand because I purchased shares of GRPN and LNKD the day of its IPO but had no plans on holding the stock long-term. As a result, the stock falls to a level in which those who are bullish of its future feel confident in purchasing the stock, which causes a domino affect as others with long-term goals purchase at low prices as well.
My opinion on why stocks fall then return gains after filing for an initial IPO is as speculative as the stock itself. The truth is that I don't know why this has occurred over the last year or why it's occurred so regularly. But what I do know is that GRPN could be an investor's best chance to capitalize on quick gains. And if this stock follows the trend of other speculative stocks, which it has to this point, then it will most likely return large gains of potentially 50% during the next month.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GRPN over the next 72 hours.