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There’s a certain thrill in the idea of getting in on the ground floor of something great. Just imagine if you’d bought some Berkshire Hathaway shares in the 1960s or Apple in the 1980s — and held on. So of course, it’s easy to see the allure buying into an initial public offering — the stock sale that takes a company out of the privately held universe and brings it to the equity markets. But how can regular folks keep up with what’s going on in that arena?
In this mailbag segment of the Rule Breaker Investing podcast, Motley Fool co-founder David Gardner and Chief Investment Officer Andy Cross field a question from a listener, and offer him some advice about where he can get the data he needs to make informed decisions on upcoming IPOs, as well as some cautions about the unusual aspects of such investments.
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A full transcript follows the video.
10 stocks we like better than WalmartWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, the Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now… and Walmart wasn’t one of them! That’s right — they think these 10 stocks are even better buys.
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*Stock Advisor returns as of November 14, 2018The author(s) may have a position in any stocks mentioned.
This video was recorded on Nov. 28, 2018.
David Gardner: Let’s go to mailbag item No. 4. This one, a horse of a different color. This comes from Brett Wham writing in from Flagstaff, Arizona. Andy, you have to love that last name. Surname Wham.
Andy Cross: I love that!
Cross: It’s fantastic!
Gardner: I wish I were David Wham! You should be Andy Wham! We can all be the Wham brothers!
Cross: I would be much cooler if I were a Wham brother!
Gardner: Brett is, in fact, a Wham bro. Let’s kick it off. “Hello, David. I’m new to investing in anything outside of a retirement account. I recently discovered the Rule Breaker Investing podcast. I’ve become more interested in learning about investing in stocks and plan to start with some ‘fun money’ as my wife and I are in our 30s and have been fortunate enough to max out our 401(k)s and Roth IRAs for a few years now. We have no debt and look forward to an early retirement sometime in our 50s. I’m not a Rule Breakers member yet. Since I’m starting out pretty small, I don’t want investment fees to eat too much of my capital just yet. Dropping hints to my wife for an early Christmas membership gift. Our gifts are generally romantic like that,” Brett confides. “I enjoy reading Fool articles, listening to your podcasts, as it’s in line with a lot of my investment beliefs, such as investing in a business that you know and for the long-term.
“As I try and do research on companies I’d like to invest in, I’m finding that many of them are privately held. Is there a good resource out there to compile and track these privately held companies to know when they might have an IPO?” Brett goes on a little bit more, but he’s basically saying he’s keeping a list of private companies. It becomes harder to know if an IPO is coming for any of them. He Googles some of these, sometimes quite frequently, to see if they might be coming public. This is a guy who’s wondering, with his Robinhood account that he mentioned later in the note, where he’s getting free trades, will that exciting new private company be coming public anytime soon? Is there a resource, Andy Cross, that you use or that we use that you’d recommend to listeners, a helpful way to track private companies?
Cross: Brett, first of all, congratulations! Not only do you have a cool last name, but congratulations on getting started with investing with the Rule Breaker style. That’s fantastic, especially with someone who’s in your age bracket. You have many, many years of investing ahead of you. Long-term, patient, business-focused, innovative investing is the way to go. I just wanted to say that. Congratulations on that, Brett!
Second of all, the IPO market has shifted and improved so dramatically over the 20 years — 22 years now last week — that I’ve been investing alongside you here at The Motley Fool. And there’s a lot more information. Historically, it used to be very difficult for individual investors to invest in IPOs. When we say IPOs, by the way, initial public offering, for those who are not used to that acronym. It’s for private companies that are issuing stock into the public market.
Gardner: When a new common stock is born, something you and I can buy on the New York Stock Exchange or the Nasdaq.
Cross: That’s exactly right. Over the years, we’ve invested in many, many, many IPOs that have gone on to produce great returns for public market investors.
Gardner: And some bad ones, too!
Cross: Oh, I certainly have too, David!
Gardner: Too early and hard on Great Wolf Resorts. I remember that one. But, keep going, Andy!
Cross: The market is now so much better for finding information. I talked to Aaron Bush, analyst with us here at The Motley Fool, a fantastic analyst and researcher. He pointed me to a few resources that I want to share with Brett. The first one is ClickIPO.com. Mobile-first, friendly application that helps regular individual investors not just learn about IPOs and businesses that are setting up for an initial public offering, but actually invest in them because their online app ties directly into many brokerage accounts. It’s really fascinating. In that application, you can sign up for it free, you can find out about companies that are preparing in the registration process to go public, and you can track the information that Brett may be looking for.
Full disclosure, I have not used it. I can’t comment on how simple it is to actually use. But the process seems very elegant, and the application is very cool. ClickIPO.com. It’s actually free to buy shares in the offering, if you can get them. It’s not guaranteed you can. And the underwriter of the stock actually pays ClickIPO for the service. That’s one service that I would certainly suggest Brett check out, is ClickIPO.com.
By the way, I will say, Brett, you don’t have to invest in IPOs. There are plenty of fantastically great businesses out there in the public market that are already public. IPO investing does come with its risks.
Gardner: That’s right. In fact, I’ve never personally bought an IPO — that is, I’ve never been invested in a private company that came public. The only stocks I’ve ever owned or recommended in our services were companies that were already public. Now, some of them were recently public. You could say it was a recent IPO. But none of us here at The Motley Fool, for the most part, in our services, are giving advice to people to get them into stocks that are going to IPO.
Cross: Yes, David, we are not, because even in today’s market, it’s not guaranteed that you can get shares. It’s still a little bit opaque when you buy. Even on ClickIPO, you don’t buy shares, you actually put in a dollar amount and they try to allocate accordingly. There are restrictions and eligibility requirements.
Once a stock goes public, there are a lot of things that affect that stock price over the course of a year, including lockup periods from insiders. So, it’s a little bit tricky. For a beginner investor like Brett, I personally wouldn’t recommend something along those lines. You can invest in so many great, innovative companies that are already in the public markets.
Gardner: That’s right, Andy. I think about, here in 2018, remember this IPO? Spotify. It’s a big, well known company. A lot of people excited about it. It came public. The stock did pretty well initially. It rose, even though this company’s still not making money. But it’s a global brand, and a big-time business. But these days, months and months later, it’s right back to about the price were it IPO-ed. It sold off. And that often happens with these IPOs. They get hyped up. People get excited about them the first few weeks, the first month, the first day. But six months later, a lot of times, they’re back to where they were.
Cross: That’s true. The advice I would give to anyone who’s looking to get into IPOs, while there are things like ClickIPO and others — Aaron pointed me to Renaissance Capital and StrictlyVC — that provide a lot of information about IPOs, a lot of insights and education on the businesses, really, investing in public businesses that are run by visionary founders, that are providing services that are unique in the marketplace, growing exceptionally, and have lots of market opportunity ahead of them, you might avoid some of the more volatile nature that will come with IPOs.
Generally, Brett, fantastic that you’re getting invested. Don’t feel like you have to go invest in IPOs. You might not even be able to because of some of the eligibility requirements. Generally, you don’t have to do it because of the great businesses that are already in the public markets today.
Gardner: Andy, I think we’re out of time for this one. Were there any other resources that you have to check out private companies? Anything else you want to mention?
Cross: Quickly, I’ll mention Renaissance Capital and StrictlyVC, which is actually a newsletter published for free. It’s a daily newsletter published by the Silicon Valley editor of TechCrunch. It provides a lot of insights on companies that are looking to go public, information on those businesses, and the details behind some of their offerings. Renaissance Capital —
Gardner: That’s an excellent site that I’ve used.
Cross: They actually have an IPO ETF for that have come public recently.
Gardner: Everybody’s got an ETF.
Cross: It’s true, including The Motley Fool.
Gardner: All the kids are doing it!
Cross: Renaissance Capital provides a lot of insights on the market in general.
Andy Cross has no position in any of the stocks mentioned. David Gardner has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Berkshire Hathaway (B shares). The Motley Fool recommends Nasdaq. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.