WASHINGTON, October 15, 2017 – We’re a little late following up on our attempt to grab some shares in CarGurus, this week’s most exciting IPO. Or, we should say, “failed attempt.” We didn’t get any shares at all, something we anticipated in our previous discussion of this issue:
“Currently expected to price tonight between $13-15, the IPO shares of Cambridge, Massachusetts-based online car-selling platform CarGurus, Inc. (proposed NASDAQ symbol: CARG) are said to be ‘hot.’ If that’s true, odds of our getting in on the offering could range from awful to non-existent.”
The IPO opened the following morning, and took off like a shot, as was duly noted in a piece on CARG posted on the sometimes useful investor site Seeking Alpha:
“Online car marketplace CarGurus priced above the range to raise $150 million at a $1.8 billion market value, then traded up 72% on its first day. While international expansion will drag margins in the near term, the company’s US business is well positioned to generate strong cash flow. Its initial success is attributable to its large scale, high growth and profitability.”
When this offering actually priced at $16 per share, $1 above range, which is usually (though not always) a good sign in a tech-oriented IPO like this one, it was clear at least to us that there were a lot of funds, institutions and investors who wanted in on this one. This generally assures smaller investors of two inconvenient truths:
- The issue is oversubscribed, meaning shares are going to be in short supply; and
- What supply there is will primarily go to the institutions, funds and the richest clients of each brokerage involved in either the IPO’s underwriting syndicate and/or the selling group of brokerages.
In other words, small investors for the most part, didn’t get any of these shares, yours truly being no exception. So the IPO priced at $16 per share and closed Friday at a phenomenal $28.48. You do the math. You need a stiff Scotch after missing out on a money treat like this one.
What was particularly galling for us was that of the 5 IPOs we’ve put in for over the last month, we were stiffed on what were clearly the two best ones (including CARG), but got shares in the remaining three, two of which have turned out to be dogs and the third one barely getting us past the breakeven point before we decided to make a quick exit.
As we’ve noted many times in these columns, IPOs for smaller retail customers are a crapshoot at best because of the brokerage firms’ traditional tilt in favor of rewarding their biggest customers with shares in these quick-turnaround money pots. Business is business, and we can deal with that. But getting backhanded two times in a row on the best deals doesn’t cut it for us, particularly when we have been getting stuck with the dogs of late. It used to work out better for us, but perhaps the algorithms have changed.
For most small investors who get stiffed, however, a second question arises once that truly pissed-off moment finally passes:
“Should I let these shares go down a bit (presuming they actually do that) and then buy some on the open market even though they’re priced much higher than the IPO shares?”
For the most part, the answer is, “No, absolutely not.” Tech and tech-oriented companies like CARG, in particular, make zero profit and will likely remain in that status indefinitely. What the initial rush of investors, not including us, of course, are pursuing (if they’re not flipping) is a chance to get in on the ground floor of a future growth company, with “growth” being the dominant term here.
Some people will pay anything for growth. If they didn’t happen to get in on a hot new IPO like CARG, they’ll tend to “chase” it as is spirals upward, which usually means they’ll get clobbered, since they’ll be buying their overpriced shares from the rich guys who got them cheap to begin with. This, then, adds insult to injury.
Having missed out on the initial thrill ride, the little guys follow the excitement at any price, buy the shares the rich guys are selling/flipping, giving the 1%-ers their expected profit right out of the little guys’ wallets. The stock eventually sinks like a rock due to “worse than anticipated” earnings the next quarter and the little guys take so much of a pasting on the stock’s precipitous decline that they give up and sell out at the lowest point, getting fiscally killed in the process.
We saw this happen in the disastrous SNAP (Snapchat) IPO in late summer. We actually got a few shares of that one, held them for our broker’s more or less mandatory 31 day holding period, watched them go down, down, down after an initial pop, but were able to sell them for a slight profit before they sank below the horizon where they remain today.
It broke my heart to read reports of millennials snapping up the post IPO shares of SNAP at high prices because they “loved” the app. Bad reason to invest. Likely, many of them have belatedly realized the same thing.
The rich guys, on the other hand, are already investing their IPO profits on the latest hot issue, which the little guys won’t get. This is, I think, a serious flaw in our system, but Washington isn’t about to address this issue, given that Congress seems pathologically unable to pass anything at all that’s beneficial to the country at the moment.
Am I irritated? Yeah. But I’ll get over it. Even with all the garbage small investors have to put up with, the stock market has still been the best place to make some actual money, given the ruthless stagnation of wages and the return on other investments since 2007-2009.
In the meantime, however, with regard to hitting the jackpot on hot IPO issues these days, I might just have a better chance of winning a round if I head down the road about 50 miles to West Virginia and hit the quarter-slot machines at the Charles Towne racetrack and casino. Strange but true.
See you Monday.