“The Secret to Trading Hot IPOs” (Taste of the Friday File)

By Travis Johnson, Stock Gumshoe, June 10, 2011

Today’s article is a rerun of an article that first appeared for paying members of the site in the Friday File about two weeks ago. It has not been updated or revised, though both stocks mentioned are trading fairly close to where they were at the time this was first published.

With IPO excitement again hitting the market pretty hard over the last six months, including the crazy performance of Yandex and LInkedIn, and the increasing lust for a “someday” Facebook IPO, I thought today’s Friday File it might be a good time to take a look at this new teaser from Jon Markman.

Markman’s newsletter doesn’t often tease stocks in their ads — he’s more of a trader, so he teases us about his techniques and past performance — but I’ve written about his ideas on occasion. This time it’s sort of a mix — he tells us that he’s got the best way to trade IPO stocks, but he also teases us about two specific ideas.

So what’s his strategy?

Here’s how he introduces it in the ad:

“The Secret to Trading Hot IPOs
“Avoid the Feeding Frenzy and Make a Ton of Money…

“The stock market is catching a wicked case of IPO fever. Which means there is a ton of money to be made right now by traders like us.

“But if, and only if, you know how to play it right.

“You probably noticed the wild ride of white-hot IPO LinkedIn. As the first social networking company to go public, this much anticipated and overhyped event became a frenzy of speculation, with more LinkedIn shares traded on its first day than traded that day in Apple, Baidu, Google, Amazon, and Netflix… combined.

“While frenetic trading may have handsomely rewarded a few privileged fat cats by day’s end, it left many regular traders licking their wounds and counting their losses, as the price rose then dove in a quick and dangerous game of musical chairs — Wall Street style.”

So that caught my interest. What, then, is his strategy?

“The Smarter, Safer Way to Big IPO Gains

“I’m Jon Markman, and I love trading IPOs for big gains. But let me repeat for you one thing I made clear well in advance to my Trader’s Advantage readers: I wouldn’t go anywhere near LinkedIn shares on day one, day two or even day ten of its trading.

“That kind of Wild West action is just way too dangerous and unpredictable.

“You see, within minutes of becoming public, the froth had made LinkedIn the most expensive shares in the U.S. on a price-to-sales basis. It was like the worst of 1999 all over again.

“Now there may very well come a time when we want to swoop in and pick up shares of LinkedIn, and if you join me at Trader’s Advantage, you’ll know exactly when to make your move.”

Hmmm. Well, I agree with him about LinkedIn, at least. So how does he trade these IPOs if he doesn’t like to get into the first-day frenzy?

“The first few days after an IPO belong to speculators trying to make a quick buck….

“And it’s after that speculative fervor subsides when the fun starts for traders like us.

“You see, this is when the share price inevitably plummets. This will surely get our attention, but it will still be too soon to make our move.

“Why? Because some of these once-hot IPOs never recover — think Pets.com and TheGlobe.com from back in the day.

“But the good ones, the ones we want to trade, will catch a second wind. And as the price begins to rise again, this time it will not be based on raw greed, but on a company’s business success.

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“And this price resurgence is often accompanied by two very important things:

“First, it often comes around the time the company issues its first earnings report, very often with stellar results.

“And second, it is around this time that stock options are often issued on the best companies, giving us the chance to turbocharge our gains.”

OK, still no real disagreement — I don’t know if it’s always necessary to wait until a new company “plummets,” but that all depends on what your definition of “p