The 2007 IPO market is setting itself up to be just as hot as the 2006 one. And Cramer loves talking about IPOs because he knows you can make money if you get in on the right ones. Some of his 2006 faves were Under Armour ( UA), Chipotle Mexican Grill ( CMG) and J. Crew ( JCG). He also recommends taking advantage of IPOs' so-called lockup expiration period to time your buys. Thus, the more you understand IPOs, the more "mad money" you can make. The average return of the 197 companies that went public in 2006 was a whopping 23%, according to Renaissance Capital. The S&P 500 was up only 13.6%. Even better, 71% of those IPOs were actually profitable. Only 26% of the companies that went public during 1999's tech boom made any money. So that's all good news. The bad news is it's still really hard to get IPO shares. But there are ways, and Booyah Breakdown is going to help you figure out how to best take advantage of these offerings.
IPO BasicsPrivate companies generally decide to go public because they need more money, whether it's for working capital, acquisitions or paying debt. So bankers are hired, attorneys are brought in, and a registration statement is filed with the Securities and Exchange Commission. Then the bankers hit the streets and try to promote the stock to potential investors. This traveling PR party has been dubbed the "road show."
Keep in mind, most of us had a better shot at getting an invite to the Tom Cruise-Katie Holmes Italian wedding extravaganza then attending a road show. The typical road show guest list consists of institutional investors or folks willing to buy big chunks of the stock. Once the bankers, a.k.a. the underwriters, believe they have enough interest to sell the stock, they attempt to set a reasonable price based on level of interest. And as long as the company agrees to the suggested pricing, an underwriting agreement is signed, a final prospectus is created for potential investors, and then it's off to the races. Now you could just wait until the stock is available on the open market and invest at that point. But here's the rub: The stock could jump on the first day of trading, so it would be nice if you could take advantage of that bounce by buying shares at the offering price. But, again, getting IPO shares is tough. They are generally reserved for the people in the inside.
Jumping on for the RideFirst decide if you even want the company in your portfolio. Educate yourself in the market space, and read the prospectus of the IPO you've selected. Determine what the company plans to do with its new financing. Is it simply going public to pay off some debt? Or is it using the money to reinvest in the company and help it grow? Use of proceeds is a good indicator for whether you want to invest.
Then go through the audited financial information carefully. But since you won't have much of it available, you're taking a risk. That means IPOs should be considered in the "aggressive" part of your overall portfolio, says Bob O'Hara, vice president of development at the National Association of Investors. Once you find an IPO that you like, the easiest way to get those shares is to have an account with the bankers working on the deal. So if you're working with say, Morgan Stanley, and it's doing the work for an IPO, your broker might be able to get you in on the action. But your broker might not be forthright about the in-house deals, so check the company's Web site to see what its working on. Or go to the "upcoming IPOs" section
on ipohome.com , which is run by investment management firm Renaissance Capital. It lists all the upcoming IPOs and their underwriters. If that doesn't work, try the fund world. For direct exposure, you can try Renaissance Capital's ( IPOSX) IPO Plus Aftermarket fund, which was up about 10% for 2006 and focuses solely on IPOs.
Get the Key to the LockupIf you can't get in on the IPO near the offering price, consider being patient and waiting until the lockup period on those IPO shares expires. At that point, the stock price usually takes a dip. Here's why. The lockup period is a predetermined amount of time following the IPO -- usually six months -- that the employees and close associates of the company who were given IPO shares can't sell that stock.
So let's presume upper management was all given IPO shares with a lockup period of six months. Let's also presume the stock started trading at $10 and by noon, the price jumped to $50. To prevent those big guys from immediately cashing in on that pop and flooding the market with their shares, the underwriters force those bigwigs to hold their shares for 60 days. But for that reason, many traders track lockup expirations because they know that the stock prices may fall after the lockup as the insiders start to sell their shares. Cramer often talks about taking advantage of these lockup periods. On Dec. 18, he referred to Omniture ( OMTR), which went public on June 28. Its lockup expired Dec. 26, and Cramer advised people who wanted to buy to wait until the lockup ends in the belief that the price might go lower. And, no surprise, the volume on the stock doubled on the day of the lockup expiration. Cramer also listed InnerWorkings ( INWK), one of his "hot new stocks." The company, an outsourcer of printing services, is up 87% from its IPO in August. Its lockup expires on Feb. 11. And while that doesn't mean you shouldn't buy the stock now if you like it, Cramer recommends that if you do buy, you should consider swapping out of it before the lockup expires "so you don't get stampeded by sellers." So start paying attention to IPOs and their lockup expirations. Try following a few first. For instance, Cowen's ( COWN) lockup expires on Monday. Valero GP Holdings' ( VEH) lockup expires on Jan 16. Then you'll be properly armed to take advantage of the IPO market. Skeedaddy would be so proud. Come see Tracy Byrnes and RealMoney.com contributors Cody Willard and Richard Suttmeier speak at the Society for the Investigation of Recurring Events' annual meeting on Jan. 16 to discuss 2007 investment strategies. The meeting will be held at New York City's Princeton Club, 15 W. 43rd St., at 6 p.m.