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Thousand Oaks IBD MeetUp Buying and Selling IPOs

Thousand Oaks IBD MeetUp Buying and Selling IPOs. Mike Scott. Initial Public Offering. A private company who wishes to raise investment capital or unlock shareholder value will elect to offer equity positions in their company with an offering of shares to the public

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Thousand Oaks IBD MeetUp Buying and Selling IPOs

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  1. Thousand OaksIBD MeetUpBuying and Selling IPOs Mike Scott

  2. Initial Public Offering • A private company who wishes to raise investment capital or unlock shareholder value will elect to offer equity positions in their company with an offering of shares to the public • These opportunities can be some of the most lucrative and the most risky • A structured approach to buying the right IPOs at the right time is needed

  3. IPO stocks need to meet the same fundamental requirements as any other stock selection • An IPO can be bought off of a shorter consolidation pattern than most other selections

  4. CANSLIM • Current Quarterly Earnings growth of 25% or more for the last 2 quarters, prefer acceleration • Annual Earnings growth of at least 25% over the past 3-5 years • Sales growth quarter to quarter • Margins increasing quarter to quarter • Return on Equity (ROE) of at least 17%

  5. CANSLIM • New Companies with New products New services New business conditions New management Companies that are dramatically changing the way we Live Work Do Business New Price Highs Studies show that new companies make their largest advance within 8 years from an IPO

  6. CANSLIM • Supply and Demand are demonstrated by huge volume increases over daily average on up days. Demand/Supply = ADV/Float • Leader vs. Laggard-Look for top stocks both fundamentally and technically in the very best performing sectors and industry groups. Look for stocks with a high relative strength

  7. CANSLIM • Institutional Sponsorship is demonstrated by BIG money. This can be seen from increasing number of institutions taking positions. Volume is a sign of institutional sponsorship. Buy higher volume stocks. • Question, how do you determine Institutional Sponsorship on an IPO? • Market Direction, 75% or all issues follow the general trend of the market

  8. The Importance of Earnings AAPL ALXN BIDU CMI CSTR KMT KORS LULU NOG PCLN SCSS ULTA CDNS AGO PVX APC GOLD GMCR ROC HMY SU

  9. Preferred Stocks to Own • US Stocks, ADR’s okay but not from countries where rule of law or transparency is in doubt (Venezuela, Russia?) • IPOs which are underwritten by one of the following underwriters: • Goldman Sachs, JP Morgan, Morgan Stanley, Merrill Lynch • Credit Suisse for the Chinese IPOs, also Citibank. • Average daily dollar volume > $20-$40M • Minimum average daily volume 200K-400K-1M shares • Minimum price $15 (NYSE) $20 (NASDQ) • Lower priced stocks are especially suspect at the end of the cycle. • Top notch fundamentals • Triple-digit EPS gains • 3 quarters of EPS acceleration • 3 Quarters of Sales acceleration • 3 Quarters of increased Intuitional Sponsorship • .03 (3%) Demand-Supply Ratio (50 day Avg volume/Float) • Satisfactory responses to the Three Questions: • Is this the very best stock I could own? • Where is the stock in the cycle? Where is the market in its cycle? • What do I think the stock pattern could be? Important for early entries.

  10. Buying IPOs • Most CANSLIM investment buy and sell rules pay no attention to the news, we pay attention to the market reaction to the news in price and volume action • There are a myriad of details that can be wrong with an IPO • For this reason we wait for market reaction to an IPO and buy the first buyable base of an attractive offering

  11. Preferred IPOs • Companies with CANSLIM traits • Offered early in a market cycle • Demonstrate institutional sponsorship • Price, Volume • Underwritten by a quality underwriter • Offered at the right price without flooding the market with shares • Supported at and above the IPO price • Show tight chart action indicating accumulation • Correction less than 20%

  12. Large companies coming public are quickly added to market indexes forcing institutional ownership • Google was added to the Vanguard Total Market index 60 days after becoming public in August 2004

  13. GOOG Offered @ $85 Never traded less than $95 Corrected less than 15% in three weeks IPO day traded >$2B Broke out of IPO base trading $600M in one day Weekly Daily IPO U-Turn

  14. KORS • Never traded below IPO price • Triple digit earnings growth • Traded $1B on IPO day • Traded $67M on breakout day • Corrected only 8% before breakout Weekly Daily U-Turn

  15. Invensense (INVN) Thinly traded issues are harder to handle Daily -24.4%

  16. Spirit Airlines (SAVE) Another thinly traded stock

  17. IPO Timing is important General Market Tops After 5-year bull market

  18. Linkedin (LNKD) Traded $2.8B on IPO day just after the market topped Currently trading 20% of float every day

  19. Facebook (FB) • Lead underwriter Morgan Stanley • Possibly the largest internet IPO, ever • 845 Million Users • Profitable since 2009 • 2011 Revenue $3.7B (+88%) • 2011 Earnings $1.0B (+64%) • $3.9B cash • China closed market? • Zinga accounts for 12$ of FB revenues • Google+ moved into social networking space last year • Where are we in the overall market cycle? • 60% market penetration in US and UK, where will their growth come from?

  20. Facebook Adoption S-Curve FB Needs a China penetration strategy You are here

  21. Some IPOs for Study * *50-day break sell rule

  22. When do you sell an IPO? +382% +311% • Sell Rule • Moving Average Break • Subsequent Undercut of Low Buy $9.73

  23. Two Useful Sites • http://ipoportal.edgar-online.com/ipo/home.asp • http://www.renaissancecapital.com

  24. Some Review

  25. When Do We Buy and Sell? • After selecting a company with the best fundamentals we need to determine when it the best time to buy a stock • We trade in the direction of the general market • After clearing a sound price consolidation or base • Within 15% of a 52-week high • We buy on fundamental, price and volume action, we sell on price and volume action only

  26. Cup and Handle Base Most predominant pattern Midpoint of handle Should be above Midpoint of base Pivot should be within 15% of 52-week high Classical Pivot (buy point) 0.10 above top of handle Prior 20%-30% rise 7 weeks • Base length at least 7 weeks long, can be one year or longer • Maximum correction 30% (50% severe bear market) • Handle at least one week, maximum 10-15% correction, 20% in bear market, if greater than one week, should decline along the bottoms • Volume should dry up at bottom of base and also in handle • Look for days of support and strength • Cup should have rounded shape along bottom

  27. (N) (N) Fertilizer business driven by Ethanol trend (S) Demand/Supply = 5.36M/309.8M = 1.7% (L) Strong Group Strong Stock (A) High 3-5 Yr EPS Growth, ROE (C) Triple Digit EPS Growth (I) 7 weeks up in a row Cup with handle (I) Increasing Sponsorship (S) Increasing Volume (C) Sales growth to match EPS growth

  28. 21 week Cup with Handle Too Deep RS Leading

  29. Deep Cup 32 Week Deep Cup and Handle

  30. Cup without Handle Base Buy point 0.10 above left side • Tend to be early stage bases of small and mid-cap stocks with dramatic earnings increases • Slightly less success than cup with handle patterns, 50% succeed vs. 70% for C&H bases • Most of these work in an emerging bull market Prior 20%-30% rise 7 weeks

  31. 30 Week Cup without Handle

  32. Double Bottom Base Midpoint must be below and within 15% of prior high Second low must undercut prior low Severe undercuts not good Symmetry is good Classical Pivot (buy point) 0.10 above midpoint • Base should be at least 7 weeks long or longer • Maximum correction 30% (50% bear market) • Movements more severe than cup and handle • Handle may form, buy off of handle + 0.10 • Look for days of support and strength Prior 20%-30% rise “W” Shape

  33. 26 week Double Bottom +63% Pivot = 107.98 + 0.10 Undercut Tight RS leads

  34. Flawed Double Bottom Base

  35. EBAY Double Bottom?

  36. EBAY Later Successful 10 week Double Bottom Flawed 10 week Double Bottom Classic Pivot

  37. Flat Base Classical Pivot (buy point) 0.10 high point of base • Secondary base, usually forms after a prior base • Sideways movement with maximum of 15% correction • Volume should dry up at least slightly Area of consolidation around which a rectangle can easily be drawn Prior Base 5 weeks

  38. Six Week Flat Base

  39. Ascending Base Classical Pivot (buy point) 0.10 above third step Almost always formed by short term general market sell off • Secondary base that usually forms after a double bottom or cup with handle base • Three pullbacks of 10%-20% in price • Successively higher lows and higher highs • Generally 9 to 16 weeks in duration Prior Base 3 pull backs 9-16 weeks

  40. QCOM Ascending Base

  41. TIE Ascending Base

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