WASHINGTON, March 2, 2017 – After generating a great deal of buzz, both positive and negative, the long-awaited IPO of Snap, Inc. (symbol: SNAP), the company formerly referred to as Snapchat, opened for trading Thursday morning on the New York Stock Exchange.
Priced at $17, a dollar over the top of its initially expected range of $14-16 per share and reportedly way oversubscribed (many more eager bidders than available stock), the new shares took some time to open for public trading this morning. The issue finally hit the tape at roughly 11 a.m. ET, opening up 44-45 percent at an unofficial opening price of $25.20 per share. As we write this column, trading continues in the $24 dollar and change range, with the latest price approaching $25 per share.
No one knows where an issue like this will close on the day of its opening trade. SNAP shares are likely to hover around the $24 zone for a time, popping further to the upside if demand is sustained or dropping somewhat if demand declines and/or initial holders who got in on the IPO simply decide to flip the shares for a quick 45 percent profit or thereabouts.
After a year during which IPOs, particularly good ones, were scarce, this substantial tech IPO, should it remain successful, may encourage others. SNAP’s reception, at least thus far, shows that the animal spirits of the amazing, ongoing Trump Rally might be receptive, at least for now, to more innovative IPOs and tech business startups than has been the case for years, particularly if at least part of SNAP’s initial pop is sustained.
(Below: Video pitching Snap Spectacles)
All the above is good news (at least for today) for our main portfolio. While we have major misgivings about Snap, Inc., we decided to bid for some shares on a speculative basis. And—surprise—we got a small allocation of 100 shares. That was less than we’d bid for, but at least we got some.
As we’ve indicated many times in this column, IPOs that become “hot” generally wind up with most of their shares allocated to rich brokerage clients. In turn, these wealthy holders often flip the shares not long after they open for an incredibly easy profit, assuming that these shares “pop” (trade up at a price considerably higher than the official IPO price).
The other allure of getting in on IPO shares is that you can buy them without paying a commission. That used to be a pretty big deal when this writer was in the business, way back in the early Reagan years. At that time, the commission you’d pay for a stock like this would probably have been $30-40 for 100 shares (known as a “round lot”). As this writer used to tell investors attending his seminars, at the average retail commission price, which is paid both for the buy and sell transactions, investors should figure that for an average-priced stock (then between $10-50 per share), you’d need to get at least a point on the upside just to break even.
Nowadays, commissions are in a frantic race to the bottom, at least at major discount houses. Schwab (our brokerage) recently dropped its average commission for buying or selling any number of shares from around $8.95 per share per trade to $6.95. Competitor Fidelity has just answered that by cutting its commission to $4.95 per trade, an action it announced in a big full page ad in Thursday’s Wall Street Journal.
To make a long story short, this means that that commission-free opening trade on IPO purchases isn’t as impressive a deal as it used to be, but it’s still worth something, even though you still have to pay the closing commission as you trade out of a given issue.
Back to the SNAP IPO, as we’ve mentioned in this column, we actually have two problems with the issue:
- The company doesn’t actually make any money, at least in the sense of generating profitability
- None of the shares sold to the public today have voting rights
Let’s take our second objection first. It’s well known by now that Snap is a rather secretive company even to the point where their unconventional headquarters are decentralized and housed in different buildings. Their main product thus far is their Snapchat app/software, although they have just begun to offer a new physical product, Snap Spectacles, which, according to The Verge, are fashion sunglasses with a built-in camera, on sale via the Internet right now.
These Spectacles are a swell idea, of course, and promise a possible path to future growth for new shareholders. But we only get the details Snap wants us to get, and we don’t have any say in corporate matters, since these new shares of SNAP can’t vote. Even a supersecret guy like the late Steve Jobs was more forthcoming than this company, and Apple (AAPL) shares still carry voting rights. Hopefully, these devoid-of-voting-rights shares won’t become a trend in the IPO future. It’s a dangerous (though not unique) situation.
Our first objection is fairly standard in the tech world. None of these startups seem to be making any money when they go public. They tend to fetch an outrageous price for the promise of future growth, which is the ultimate goal of any die-hard investor. Capital gains via profitability is the game, and if investors are confident they’ll eventually see those earnings, they’ll climb on board an IPO no matter how much red ink the company is throwing off, particularly if the company is in tech.
Nevertheless, we’ve gotten old and rather conservative on this kind of cockeyed optimism, given that we rode through the dot.bomb debacle circa 1999-2001. At that time, every bizarre idea and project imaginable launched an IPO whether it made any sense or not. A few of these survived. Most died, losing a bucket of money for their investors. And at least one—Priceline (PCLN)—suffered a near-death experience before resurrecting itself (without bankruptcy protection) to become one of the great money machines of our time.
IPOs are, in general, a crapshoot. They are more of a risk for us because, under our brokerage’s house rules, we get penalized if we sell the IPO shares we’ve just bought before a 30-day holding period elapses. I.e., we can only sell without penalty on day 31 or later.
Generally, those buying IPO shares from the underwriting brokerage houses (big ones like Goldman Sachs (GS) and Morgan Stanley (MS), don’t have these kinds of restrictions, while discount brokerage clients often do. That’s because the big underwriting houses actually pony up the money to buy the shares of the IPOs—all of them—before packaging them up and selling them to investors, which is at least in part why everyone gets a commission free trade. Compensation for the underwriters is already baked into the deal.
In a big issue like SNAP, however, the underwriters often involve other brokers to move the shares and get them distributed quickly. These brokers, like Schwab (SCHW), E-Trade (ETFC) and others are (or were in my day) known as the “selling group.”
But to get shares, those brokerages in the selling group often have to impose some kind of deal, as the lead underwriters traditional are allowed (legally) to support the IPO price for up to 30 days by buying and selling shares on the open market in order to help a stable price for the shares to become established. Hence, our brokerages “restrictions” on selling the shares earlier than that elapsed 30-day wait.
Now, a customer can indeed flip those new IPO shares. But in our case, if we did so, we’d be banned by the brokerage house from participating in any IPO deals for the next 90 days. This is irritating to the individual investor, of course. It irritates this writer, too. But, having been in the business, we know that brokerages have an obligation to try to keep the new issue’s price relatively stable for its first month of trading, so we figure that if the discount houses didn’t agree to some sort of restrictions on flipping, they wouldn’t get allocated any shares from the underwriters.
It’s all kind of complicated, it’s irritating, but it’s also a good policy in its own way. Otherwise, the rich guys at the big houses would get all those hot IPO shares. This way, little guys (like this one) can sometimes get hold of at least a few shares of a hot issue and enjoy at least a portion of the upside fun, assuming that at least a portion of that initial pop remains until the 31st day after the initial trade.
In our experience, the big, big initial pop almost inevitably erodes, sometimes a little, sometimes a lot. But also in our experience, if we choose carefully among available IPOs, we end up retaining enough of that first pop so that we get a bigger than usual profit, percentage-wise, if we behave ourselves and make that trade 31 days or more after we acquire the shares.
Frankly, sometimes we just hold on for awhile if the new shares are really humming. We currently hold the IPO shares of Invitation Homes (INVH), a veteran real estate investment company that just went public with these REIT shares. It makes money by buying up and then renting surplus single family homes in undersubscribed markets as well as in developments that may have gone belly-up in the Great Recession.
With higher mortgage rates on the near horizon, it’s clear that the trend favoring renting over buying may continue for some time, so this is an attractive issue we might like to stay in for a time.
In February, we also acquired shares in Houlihan Lokey, Inc. (HLI), in what’s called a “secondary issue.” This IPO-like transaction occurs when an existing publicly traded company decides to raise some cash by issuing new shares.
Given that the financial sector has been on a tear lately, we decided to pick up some shares of this one. That purchase stayed flat after the opening trade for roughly 10 minutes when the shares opened the following day, but then trended modestly up. Since then, HLI’s secondary isn’t breaking any records, but it’s nicely up for us. It also pays a decent dividend (currently 2.48 percent) and might also turn out to be a longer term hold after our 30 days are up.
Yet you never know with IPOs. We’ve been thoroughly hosed by a few of these issues here and there. But, over time, if you carefully pick and choose from among the available IPOs, this can be a nice way to juice up your portfolio’s return.
Since we’ve discussed these issues at some length today, we’ll let you know what we decide to do with them when our “penalty time” expires.
Meanwhile, on an otherwise gloomy trading day, we’ll leave well enough alone for now in each of our portfolios.