IPO Trading Review for the Week of August 2-6, 2021

August 8th, 2021

Remember to catch me live on Benzinga Pre-Market Prep tomorrow at 9:00 AM EST to recap last week’s winning IPO trades and preview the IPO calendar for the week ahead:

Well, so… yeah…
… more than half of the IPOs slated for last week were postponed indefinitely, and for several of those, it was their second postponement. So what’s going on, and what can we learn from this to improve our IPO trading strategy?

It’s hard to ignore the fact that IPOs have been getting rescheduled at a rapid rate for the past several weeks: at first it was just the Chinese stocks, which seemed rather obvious given the debacle that was the DIDI IPO followed by the PRC crackdown on ed-tech companies.

But this phenomenon quickly bled into other sectors, with tickers like WCGC, HCRX, BBCO, and others getting pulled without any specific reason other than being “due to market volatility”. And many other stocks, such as WEBR last week, have debuted at significantly reduced valuations than originally anticipated.

Market volatility? IPOs are inherently volatile, and the market hasn’t been particularly more ‘volatile’ these past few weeks than say, all of last year. So what’s the real story?

I’m not privy to the inside discussions between the underwriters, investment banks, and CEOs that make the decisions behind these moves, but we have seen a recent trend in IPOs failing to deliver an immediate “POP” on their debut, as it appears that retail traders have been willing to take more of a ‘wait and see’ approach to buying into new stock debuts.

My guess, is that the institutional investors aren’t loving this, and without the virtual guarantee of instant profits, they have decided to sit out or reduce their commitments to buying into the initial share offerings of these companies.

I also wonder if some of this is in reaction to many companies giving more opportunities to retail investors to request allocations of shares at the IPO price. It would stand to reason that if more retail traders are buying at the IPO price, there would be less retail demand once the stock debuts, thereby reducing the initial debut premium… which would then turn off institutional investors from supporting the IPO.

When I started trading IPOs, I quickly learned how ‘unfair’ the game was for retail traders – giving institutional investors the opportunity to buy shares at a discount which for trading on ‘public markets’ that were instantly priced at a significant premium before the actual public could buy the stock was a prime example of how finance makes the rich richer. But I also understood why this a necessary evil, and beyond that, understood that it produced a predictable opportunity to take quick profits on the debut of popular stocks.

So has this opportunity disappeared?
No, but it has changed my strategy, particularly around the less retail focused brand names.

Here are my key takeaways for playing IPO trades in the current market conditions:

  • Be selective: Play the recognized brand names that are likely to get a Day 2 boost. And recognize the risk of high float plays when trading volume is down across the market.

  • Buy the opening dip: We haven’t see a stock rip out of the open for a while, so there’s no real need to buy in on the debut price. I’ve been setting a buy order BELOW the indication price, with a plan to double down if I see a further dip. Even the best winners of the past couple weeks have all dipped before they ran.

  • Be patient: We’ve seen a handful of the recent IPOs take a day or two (or three) before they make their runs… (looking at you HOOD).

Alright, enough talk, let’s review the winning trades from last week:

Weber Grills (WEBR) – this was a pretty safe call, given the performance we saw out of COOK the week before, but when they significantly reduced their offering and priced below range, things started looking a little dicey. As I mentioned above, I’m not playing anything off the debut, so when the pre-debut indication price showed $17.25, I put my limit order in at $16.15 and pretty much walked away for the day and waited for the Day 2 media cycle to kick in. The media kick delivered as expected, and WEBR peaked at $19.70 in the opening minutes of Day 2. So if you did buy the debut, you were still able to take profits, but if you undercut the debut or averaged down on the opening dip, your profits were that much sweeter.

European Wax Centers (EWCZ) – Kinda felt like I was missing out on this one, but wasn’t gonna trade on something I wasn’t confident in, so I passed on this one… turns out I missed a solid opportunity, as this one debuted at $19.00, and after momentary dip do $18.62, embarked on a steady 2 day run to a high of $24.70.

Adagio Therapeutics (ADGI) – We ended up only having 3 real IPOs last week, and all of them offered win opportunities. ADGI didn’t live up to the high hopes we had for it, given the run that ICVX made the week before, but it still offered some excitement as it opened at $21.00, dipped briefly to $20.50, and then ran up into a halt at $23.19. However, in this case, the halt killed the rally, and from there, ADGI puttered out for the remainder of the day, to close basically where it started. I’ll be keeping an eye on this one for next week though, these COVID plays seem to have some surprises in them.

Remember to catch me live on Benzinga Pre-Market Prep tomorrow at 9:00 AM EST to recap last week’s winning IPO trades and preview the IPO calendar for the week ahead:

NOTE: I’m not a financial advisor, this is not financial advice, just information – use it as you see fit. I may have or may establish a position in the equities mentioned in this newsletter. Trade your own trade, and good luck out there.

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