WASHINGTON, April 6, 2017 – We’re back, albeit briefly. Aside from that surprise rally Tuesday and the equally surprising market reversal Wednesday afternoon, stocks still seem stuck in their sideways pattern, which has yet to resolve. As a result, most of our activities have involved taking advantage of (or not) the random IPO offerings that our discount brokerage can get in on.
When one of these shows up, we usually have 1-3 days to evaluate the prospectus (online now) and decide whether we want to get in on company X or Y or pass on the IPO entirely. Ditto when the offer is a “secondary,” which means the stock is already publicly traded but has decided to issue more shares via a new offering.
After something of a drought in February, IPO offerings have been picking up of late. We were shut out of one of the better ones, MuleSoft (symbol: MULE), but thus far have managed to get shares in pretty much whatever we were looking for.
The greatest adventure, now nearly complete, was in Snap, Inc. (SNAP), parent company of Snapchat. While we don’t particularly like this company, as its snitty, “secretive” owners decided not to give shareholders a vote, we decided to try for some shares of this IPO as a spec… and actually got an allotment of 100 shares, though we’d asked for more. We figured the shares would pop at the open, which they did by some 50-60 percent or so as I recall.
However, our interesting IPO problem, as we’ve noted here before, is that we can’t “flip” those shares if a big pop like this happens. We have to “voluntarily” hold them for at least 30 days before selling, unlike the rich guys doing business at the full-commission firms. They can usually flip a popping IPO at will.
We figured SNAP would quickly get sold or shorted, as it appears much of Wall Street didn’t really respect this company’s disdainful investor methodology either. Sure enough, the sellers and short artists showed up en masse the second day after the IPO and started selling the dickens out of SNAP. Nonetheless, we hoped the stock would hold onto at least enough gains to give us a small profit when we exited as planned on Day 31.
Fortunately, the options folks quickly created calls and puts for the new stock, so we bought a put option as “insurance” that we could dump the stock on someone else for $19 per share if that, in fact, was what the stock was about to do. (That’s still $2 per share above the IPO price.)
SNAP has been moving more or less downward since we bought that put. But when our 30-day holding period ended, we looked at the market tea leaves and sold our small number of allocated shares for roughly a 30 percent profit when SNAP reversed direction and went up on Tuesday.
We are still holding that put for a loss at the moment (it expires worthless on April 21). But might trade it out if SNAP continues to sink, making the put worth something.
We calculated this transaction so we’d make a decent net profit on the whole package even if the put ended up expiring worthless. Yes, it was a tiny amount of money, say for someone like Bill Gates to play with. But whatever we can get in IPO land, we’ve learned to work with it, and this little game we played with SNAP was worth it in the end.
On other fronts, we bought into a secondary issue of big data massager Keysight (KEYS) and are up almost 4 percent at the moment—not bad as we didn’t expect a whole lot out of this one.
Tuesday, we got a nice pop out of a master limited partnership (MLP) spun out by the Hess Corporation (HES) a modestly sized U.S. oil conglomerate. The new shares of Hess Midstream Partners (HESM) surprised us with a better than average pop for this sector and we’re currently up roughly 12.5 percent on this one. On the other hand, we need to hold this one for those 30 days we told you about, so who knows how this one will end?
We await pricing this evening for what will be the last IPO available to us for this trading week. It’s another cloud company known as Okta (OKTA) that doesn’t make any money but “shows promise.” If it gets “hot” (the Wall Street term for IPO that’s in-demand to the point where there aren’t enough shares), the rich guys will get all the shares and we won’t. But sometimes we do. Yet we won’t have a chance to get any shares if we don’t give it a shot, so we’ll be after this one this evening if the pricing turns out right.
That’s really about it, aside from the usual housekeeping chores in our portfolios. We’ll let you know sometime tomorrow how the OKTA IPO turns out, or if we failed to get any shares at all.
Remember, you always have to take a chance on things like IPOs, after making a reasonable guess as to what’s likely to happen when the new stock opens for trading. Yeah, sometimes you lose. But if you don’t play at all, you never can win.
Plus, bidding on IPOs is a fun thing to do when the market hits a fairly boring patch over all, like the one we’ve been in lately.
*Cartoon by Branco. Reproduced with permission and by arrangement with Comically Incorrect.