Editor’s Note: In today’s Wealthy Retirement, Senior Managing Editor Rebecca Barshop of our sister e-letter Profit Trends explains how plenty of people mistime their investments in IPOs.
– Kyle Wehrle, Assistant Managing Editor
Last year, we saw an all-time record high for the number of initial public offerings (IPOs) hitting the stock market: 1,035.
This was more than double 2020’s “boom” and even beat the dot-com-era record set back in 1996.
Now, the IPO rollout has slowed down a bit so far this year. But that’s of no consequence to us right now.
Because we shouldn’t be looking one or two months into the future for our next wealth-building opportunity.
We should actually be looking six months into the past.
Timing Is Everything
In recent years, IPOs have been trendy. Many novice investors believe they are one lucky call away from finding the next Amazon. But I’m going to add an asterisk and some fine print to that belief…
IPOs can provide life-changing profits if you know when to jump in.
Now, I never buy stocks the day they go public.
That’s like putting your wallet into a pocket with a hole in it.
This is because a stock’s opening price on the day it goes public is almost never the same as its IPO price.
Premarket excitement and overeager investors often inflate that price to more than what a share is worth.
Let’s look at a highly anticipated IPO as an example: Airbnb (Nasdaq: ABNB).
The hospitality company was slated to go public on December 10, 2020, at a valuation of $68 per share.
By the time the bell rang to open the markets, a share of Airbnb was already trading for $146…
You would have overpaid for that share by a whopping 114.7%!
Over the course of the day, Airbnb’s price hit an inflated high of $165 before settling in for the night at $144.71, still more than double its pre-IPO valuation.
The joyride Airbnb kicked off on IPO day lasted a few brief months before – right on cue – the company’s stock ran out of gas.
Fool Me Once
You see, every newly public stock goes through a lockup period.
This is when early investors and company insiders are obligated to hold on to their shares.
Until it ends, they are not allowed to sell their stakes in the company.
On a set date roughly six months (depending on the company) following the IPO, this lockup period expires. And that’s when a very predictable exodus takes place…
On May 17, 2021, the day Airbnb’s lockup period expired, the stock price closed at $132.50.
Cue sad trombone…
That means, if you had overexcitedly thrown in your money on day one, your investment would have been down 9.2%.
Sadly, this is not a one-off irregularity.
This is a time-tested market reality that plays out over and over again. And each time, it fools a whole new group of investors.
An Easy Double
This column isn’t just a warning. There’s a lesson here.
Because there is a way to make money on an IPO… and it can be found on the lockup expiration date.
Let’s see how Airbnb has fared since its dip into the red…
As I write this, Airbnb shares are trading at $160.95.
If you bought Airbnb on its IPO day at $146, you’d be looking at a 10.2% gain.
I can respect that… but I can also do you one better.
If you bought Airbnb on its lockup expiration day at $132.50, you’d be sitting pretty on a 21.5% gain.
And just like that, you’d have more than doubled your potential return!