How to Play the Hot IPO Market for Profit This Year

In the late 1990s, the demand and market for initial public offerings (IPOs) was sizzling with the promise of staggering one-day gains for those lucky enough to get in on the ground floor with share subscriptions. We saw millions made in one day for the chosen ones—the rich.

But that was then. The IPO market, while still quite popular, is nowhere near where it was back then. Investors are now pickier on the issue.

Recall King Digital Entertainment plc (NYSE/KING), the maker of Candy Crush Saga. In my view, this has to be one of the most hyped-up IPOs in recent times. Debuting at $20.50 on March 26, the stock is currently trading at $17.00, but even at this price, I think the valuation is crazy, with a market cap of $5.42 billion. This company doesn’t even make money and it’s vulnerable to weakness for those looking for an aggressive short selling opportunity.

In the social media space, the biggest and most highly anticipated IPO following the debut of Facebook, Inc. (NASDAQ/FB) was social media play Twitter, Inc. (NYSE//TWTR). Yet unlike Facebook, Twitter doesn’t currently have any major revenue streams and is still looking for ways to make money. While Twitter is way down from its high of $74.00, I still wouldn’t be a buyer at the current $39.00. The company doesn’t deserve its market cap of $23.0 billion. Until Twitter can provide a valid revenue model instead of its annoying ads placed in the middle of tweets, I would not buy. A decline to below $30.00, however, could provide an aggressive trade.

What’s going to be hot this year is still anyone’s guess, but technology and social media will likely continue to be a place for investors to look for hot IPOs.

The biggest anticipation is probably for Chinese Internet play Alibaba, which is set to debut in the United States later this year. By all accounts, Alibaba will be the largest Chinese IPO and will be bigger than Facebook or Amazon.com, Inc. (NASDAQ/AMZN). You likely won’t get early shares of Alibaba, but you can play its IPO via Yahoo! Inc. (NASDAQ/YHOO), which holds a stake in the company.

Debuting today will be GoPro, Inc. (NASDAQ/GPRO), the maker of the head-based wearable high-definition cameras that you see in many sports and outdoor adventure stores. The expected price is around $21.00–$24.00, but the stock could pop at the open. I would be waiting on this one, as GoPro is essentially a one-gadget company and that makes me uncomfortable with this play.

The safest IPO bet debuting today is ServiceMaster Global Holdings Inc. (NYSE/SERV), a maintenance company servicing residential and commercial buildings. The company’s key unit is its pest control business.

Other IPOs that may debut this year, depending on the stock market conditions, are Airbnb, Dropbox, and Square.

Airbnb operates an Internet site that allows users to list and rent home-based accommodations online as an alternative to paying for hotel rooms.

Dropbox is another interesting IPO that many of you are likely familiar with. This company offers an online service that allows for the storing of files in the cloud, allowing users to access them from anywhere they can access the Internet.

Then there’s Square—a mobile credit card service that allows merchants to accept credit card transactions using their smartphone.

A good investment strategy for playing the IPO market, unless you have access to the top issues, is to wait for the debut before deciding what to do. A popular issue such as Alibaba will surely see its price surge on its first few days, so it makes sense to wait and buy on weakness.

Alternatively, you could play an IPO exchange-traded fund (ETF) that buys new IPO issues, such as Renaissance IPO ETF (NYSEArca/IPO), which buys IPOs starting the fifth day of their trading on the stock market.