Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Investors Flocking to Hot IPOs in Spite of Market Fear

Friday, December 16th, 2011
By for Profit Confidential

Happy to see someone’s buying stock…

The year 2011 has been a difficult year for the stock market considering how well stocks performed in 2009 and 2010. Looking at the stock market and all the negative news we hear about the economy and the eurozone, it sounds like investors are avoiding the market. Wrong.

Appetite for stocks in the last quarter of this year has been exceptionally strong for IPOs with a good story. Consider these new IPOs:

Zynga Inc., the biggest maker of games for the web site Facebook, will raise about $1.0 billion in it initial pubic offering today, making it one of the hottest of this week’s IPOs. This offering values Zynga at $7.0 billion, almost seven times revenue.

Michael Kors Holdings Limited (NYSE/KORS) jumped 21% yesterday on its first day of trading. Another one of the hot IPOs, this company, which competes with Coach, Inc. (NYSE/COH) selling handbags at the retail level for about $400.00, is valued at almost five times sales.

Other hot IPOs…

Angie’s List, Inc. (NASDAQ/ANGI) raised $132 million in November. Groupon, Inc. (NASDAQ/GRPN), one of the most awaited IPOs of the year, raised $805 million in November.

Not only are these IPOs raising big money, but they are also selling at high multiples of sales instead of multiples of earnings! Would I buy any of these IPOs? Of course not: I don’t have the appetite for the risk they present. And when the bear market rally we are currently experiencing finally ends, it will be these kinds of companies, companies selling at five to 10 times sales with unstable earnings that will fall the fastest.

My strategy? Same it’s been the last 10 years. I just continue to buy boring, not-so-sexy senior gold mining stocks when the price of gold bullion corrects sharply on the downside, like it did this week. As for those hot IPOs, while I’m happy to see that investor appetite for them remains strong, I’m staying away from them.

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Wall Street’s making big money over these overpriced IPOs. They’ve gotten so smart; most companies are only selling 10% to 20% of their equity. This creates perceived value for the company issuing the stock. With so many investors and funds out there chasing the little stock that is offered, only “quality” clients of the big brokerage houses are able to get in at the early stages of the IPOs. It’s one of those “the public be damned” situations again.

Where the Market Stands; Where it’s Headed:

Only two more trading weeks in the year and the stock market continues to keep investors on edge—will the market close higher for the year or not? The Dow Jones Industrial Average opens this morning at 11,868. The world’s most widely followed stock market index started the year at 11,557. And yes, I’m betting 2011 will squeeze by as a winner year for stocks.

I continue to believe that we are in a bear market rally that started in March of 2009. I also believe that stock prices will head higher first, before heading back down. Hence, I see the bear market rally, while limited in life, still having room on the upside.

What He Said:

“There is no mixed signal about this: foreclosures in the U.S.will continue to rise, the real estate market will get weaker, and the U.S.economy will get weaker. Smart investors should seriously consider unloading their stocks of consumer-products companies that produce nonessential goods.” Michael Lombardi in PROFIT CONFIDENTIAL, March 12, 2007. According to the Dow Jones Retail Index, retail stocks fell 42% from the spring of 2007 through November 2008.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles