The Only 2021 IPO I'm Buying in 2023

These steps will save you thousands...

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Do you remember the “hot” IPOs from 2021?

These were companies like SnowFlake (SNOW), Airbnb (ABNB), and Palantir (PLTR) who saw their shares trade on the stock market for the first time.

This event is known as an “initial public offering” or IPO. And at the time, more companies were going public than at any time in the previous decade.

But by 2022, this trend had reversed, leaving the share prices of many of these IPOs well below their IPO price…

…which begs the question: are any of these “failed” IPOs a buy today?

How a Company Goes Public

To figure out which IPO to buy on the dip, you first need to understand how companies go public.

An initial public offering (IPO) is when a private company offers its shares to the public for the first time.

A company “going public” must take the following steps:

• Select underwriters to evaluate the risk associated with the offering

• Determine the offering price through market analysis

• Prepare a prospectus detailing the company's financials and risks

• Get approval from regulatory bodies.

The company then goes public on a stock exchange, allowing investors to buy and trade its shares.

Now that you know the basics, let’s look at how to pick the “best” IPOs.

The Underwriter Tips Their Hand

There are certain criteria that separate IPO winners from losers.

And one of the best places to start is by identifying who underwrote the IPO.

An underwriter is the bank that evaluates and assumes the risk associated with the company going public. They are the ones evaluating how risky the company is, how the stock should be priced, and other criteria for bringing the company to market.

The most prestigious and reputable underwriter is Goldman Sachs.

Having a company like Goldman Sachs underwrite your IPO is a vote of confidence since they can be very picky with which companies they choose to bring public. Most companies would love for Goldman to bring their company public.

And since Goldman can choose what they believe are the best IPOs, it follows that any company they bring public is of good quality.

In addition to Goldman Sachs, Bank of America, Morgan Stanley, and JP Morgan Chase are also top-tier underwriters. If one of these companies is bringing your prospective IPO public, you’re in good hands.

The All Important “Lock-Up” Period

The second thing you want to watch is the lock-up period.

When a company goes public, insiders must wait a mandated period before selling any of their shares (dubbed the “lock-up period”). This can be 90–180 days after the IPO date, or even as far as 12–18 months.

Lock-up periods prevent insiders from dumping large amounts of shares on the public at once.

For instance, most companies sell roughly 20% of their equity when going public. 

That means if a single large shareholder dumped their 15% stake on IPO day, that would potentially send the stock price spiraling.

That’s a key reason a study from New York University showed that after the end of a lock-up period, stocks tend to fall 1%–3% on that given day.

Plus, if there’s lots of “insider selling” on an IPO, that would send a negative sign to investors looking to buy the IPO. 

So if you plan to buy an IPO, make sure to wait until after the lockup expires before opening a position.

Keep an Eye the Smart Money

Managers of institutional investment funds (such as hedge funds and pension funds with assets over $100 million) file something called a Form 13F with the SEC every quarter. These filings disclose all stocks owned by these institutions.

Most importantly, this form shows changes to their stock holdings. Since these filings are published every 3 months, you can see if any of the top hedge funds bought the IPO you’re monitoring. 

If the top hedge funds are investing in your IPO candidates, you should take note. 

Some of the best-performing hedge funds I follow include Bridgewater Associates, Duquesne Family Office, and Elliott Investment Management.

Get Your Checklist Together

While all these criteria are important, the most important rule is to never buy on IPO day.

That goes double for “hyped” IPOs like Airbnb, Snowflake, and Rivian. Because while these stocks may “pop” on IPO day, you often get a pullback in the stock over the following year.

The degree to which these stocks pullback also gives us valuable information, as it tells us how strong the underlying business is.

A few IPOs from the last four years that have held up best are Airbnb (ABNB), DataDog (DDOG), and Warner Music Group (WMG).

But there’s only one I’ve been buying with my own money: Airbnb.

The stock got whacked in 2022 with the rest of the tech sector. But it’s since rallied back near its IPO price:

With the company slated to grow earnings 22% over the next five years, Goldman Sachs underwriting their IPO, and 64% of shares owned by institutions, it checks many of my boxes.

But either way, remember these criteria the next time you’re thinking of buying a recent IPO.

Stay safe out there,

Robert