Staying Dry With IPOs When the Market's All Wet

As Monday's market action indicates, we can't always have great weather for the IPO parade. Here's what to do about that.
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Watching an ugly market -- and yesterday was one ugly market -- is never fun. But life is like that sometimes. In the context of this IPO market and the deals slated for this week, the question is how to trade the deals in a down market.

When things get rocky out there it is usually best to sharpen your pencil and focus on quality. If there are deals that feel a little shaky, or deals that look attractive only on the basis of strength of other recent issues in the same group, perhaps it's best to sit back and watch these go by.

There are of course some deals that beg to be bought no matter what the current environment is telling you. These are the stars -- come rain or shine.

But apart from a rarified few, how do you know which deals are weather-resistant and which will get soaked? Go back to the fundamentals. Take a hard look at the prospectus and ask yourself these questions:

  • Is the company in a favorable business?

  • Who are its competitors and how are they faring in the current market?

  • What kind of shape is the company's balance sheet in?

  • Is there an appreciable growth in revenue?

  • Does the company have earnings and, if so, is there a clear trend from quarter to quarter, and year to year?

The hardest question to answer honestly is also the simplest: Why am I buying this stock? If your intent is to flip a new issue and take a quick profit, understand that a bad market may work against your goals and force you to hold a stock longer than you had originally planned. My unwavering advice here is to have a plan -- and to be clear on how you will react, no matter what the market throws at you. Know the answer to the following questions

before

you take a position in an IPO.


  • What is my holding period -- hours? days? weeks?

  • What is my tolerance for risk? How much downside will I accept before closing out the position?

  • What will I do if an IPO I buy turns violently downward?

Whatever your style, whatever your plan, it is important to anticipate problems in your trades. Just as in life, being prepared for bad weather will help keep you warm and dry.

Now that you're well-dressed for this week's possibly stormy action, let's get to this week's expected deals:

Ben Holmes is the founder of ipoPros.com, a Boulder, Colo.-based research boutique specializing in the analysis of equity syndicate offerings. This column is not meant as investment advice; it is instead meant to provide insight into the methods of new and secondary offerings. Neither Holmes nor his firm has entered indications of interest in any of the companies discussed in this column. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Holmes appreciates your feedback at

bholmes@ipopros.com.