Seven things to look for in an IPO
I have been trading IPO breakout as one of the daily core methods and by trial and error found certain things work better on IPO. Those 7 things are now crystallized as guidelines for selecting IPO trades. They are in order of importance:
- High volume on breakout. You want to see 2to3 times or more volume than average 10 days volume for the IPO. For IPO with less than 10 day trading history you want to see a highest volume or second highest volume day since IPO launch on breakout day.
- A 5 to 10 days sideways move prior to breakout day.
- Relative linear trend. Relative linearity is one of the most important criteria I use in all my breakouts based swing trading methods. The Relative Linearity or Fractal Efficiency scan in Telechart can be done as:
(C – C20) / (ABS(C – C1) + ABS(C1 – C2) + ABS(C2 – C3) + ABS(C3 – C4) + ABS(C4 – C5) + ABS(C5 – C6) + ABS(C6 – C7) + ABS(C7 – C8) + ABS(C8 – C9) + ABS(C9 – C10) + ABS(C10 – C11) + ABS(C11 – C12) + ABS(C12 – C13) + ABS(C13 – C14) + ABS(C14 – C15) + ABS(C15 – C16) + ABS(C16 – C17) + ABS(C17 – C18) + ABS(C18 – C19) + ABS(C19 – C20))
Using above scan you can pick stocks with greater than +0.30 readings. They tend to have smoother trends. - Stocks should not have 2 or more 4% =ve or -ve breakouts in last 5 days prior to breakout day.
- IPO’s with clearly defined catalyst like earnings, or new product or some other catalyst tend to do well.
- IPO’s with high earnings and sales growth tend to make explosive moves. I always look for an IPO with 100% plus EPS or sales growth.
- Top 20 sector IPO. IPO’s from Top 20 ranked sector by momentum tend to do very well. In such cases even if they do not have catalyst or earnings, they tend to make explosive moves.
IPO’s also offer opportunities on short side. Most IPO’s go down post launch. IPO’s as a group tend to under perform the market. One of the problems for trading IPO on short side is liquidity. Many have poor liquidity. Concept IPO’s often are good short selling opportunity. Concept IPO’s are IPO of companies which have a hot concept but to sales or revenue. These kind of IPO often enter the market during extreme bullish phase. Once the novelty of the idea wears off they spend rest of their time going down.
When the Oil and Gas sector was hot number of IPO’s came in to market and many of them are now just footnotes in history. AONE was a cult IPO last year. Now it has been steadily ticking down. Current hot concept IPO is TSLA. At some stae it has high probability of going down. The dot com era was ultimate in concept IPO’s. Companies with no revenue and no profit entered market and for few days or months had valuation greater than many established companies and then they crashed. Many green energy and wind energy IPO are now in similar situation.
Nothing changes on WallStreet, tomorrow some other sector might catch investors fancy and IPO’s in that sector will be hot. So having IPO based swing trading method in your arsenal is always a good strategy.
As a side note IPO tend to do well at start of a new bull move. Often they tend to be early indicator of impending bull move 2 or 3 months down the line in general market. So watch the IPO’s closely.
In recent market rally, the biotechs have seen some major moves. Many of the drugs and biotechs related stocks have seen 300% plus moves in compressed time frame.
This has attracted lot of investors and traders to focus on them. The biotechs have a unique trading pattern. Understanding how a specific industry trades can provide you with an edge. Most of these stocks have no sales, no earnings and when the sector is in favor they make 100 plus moves in jiffy.
Biotechs is pure speculative game. One can make lot of money in it if one manages risk properly. Some of the things I have found over the years by trading biotechs
are:
- Episodic Pivots are best to time entries in biotechs. Most biotech moves are precipitated by some news events.
- The sector gets in favor and out of favor. Mostly these things are also linked to decision cycle by FDA. When sector is in favor the more speculative ones pop one after another.
- One must buy the first breakout and on first day. It is pointless to buy second breakout. One must put full position at beginning itself. The rallies in these names are so compressed that in few days or week they make bulk of their move. So either you are in or you are a spectator.
- In most cases there is one intense 10 to 30 days burst followed by long sideways move, which invariably fails. It looks very attractive like a flat base and often has upside breakout which fails. I normally liquidate my position in 20 to 22 days in such plays.
- Insider buying on biotechs is very good indicator.
- Playing biotech is like playing lottery. There is very high risk.
If you want to really understand the sector and what happens behind the scene in biotech, I highly recommend the book :From Alchemy to IPO by Cynthia Robbins- Roth
This book is by a former Genetech scientist. It will give you an excellent perspective on the entire biotech industry. It covers both the inner working of biotechs and the business side of it.
