What IPO Mania in the Markets Tells Us Today

I began my career on Wall Street in the early 1990s. My career on the investment side began in earnest right at the beginning of the great dot-com bubble.

As a young portfolio manager just starting my career during the ensuing "craziness," it was hard to have any perspective because I really hadn't seen anything else.

And yet, whenever someone asks me about the craziest thing I ever saw in all my years as an investor... it wasn't 9/11, the collapse of Lehman Brothers, the 2010 "flash crash," or even COVID-19 – it was by far the events of 1999.

In the financial media, we've been hearing a lot more about 1999 recently.

And the craziest of the crazy at the time was the market for initial public offerings ("IPOs").

With the recent success of IPOs like home-rental company Airbnb (ABNB), food-delivery service DoorDash (DASH), and data warehousing firm Snowflake (SNOW), we're hearing many analogies to 1999. Just on their first day of trading, shares of DASH were up 80% and ABNB shares more than doubled!

These are single examples... so how does the overall market for IPOs compare to what we saw in the dot-com boom? And what steps should you take to make smart trading decisions in this environment?

To determine this, I used research from Jay Ritter, a finance professor at the University of Florida who has a comprehensive database of U.S. IPOs dating back to 1980.

While the first-day average return of an IPO last year was 37%, it was 56% in 2000... and more than double that in 1999. In 1999, a remarkable 116 IPOs more than doubled on their first day of trading.

Back then, we saw incredible first-day returns from tech companies like Red Hat, which soared 272%... Ariba (now SAP Ariba), up 291%... Sycamore Networks, up 386%... and Akamai Technologies (AKAM), up 458%.

So, what does all of this mean?

Well, first, it signals that the market can get a whole lot crazier from here...

But it's also a warning sign, as this "irrational exuberance" from investors can lead to a vast depression... Just look at the Nasdaq Composite Index after the dot-com bubble burst – which fell nearly 80% from March 2000 until October 2003.

Interestingly enough, some of those companies with the amazing first-day IPO returns that we highlighted above actually ended up becoming great businesses... and even great stocks.

But with massive returns out of the gates, it took years for these stocks to become profitable for investors.

Additionally, while the Nasdaq and tech stocks ended up collapsing, we saw huge increases in areas of the stock market that had been left behind.

This actually created one of the best investing periods for strategies like mine – going long stocks as well as trading in the short term.

This all leads to the final question... What should investors be doing here?

As a general rule, if you make 100% in anything in a day – sell! At least some of your position... and probably all of it.

One easy rule I use is that if you see a quick double (say, in a few months), sell half of the position. That way, you've taken your initial chips off the table... and if the stock continues to go crazy, you can ride the remaining position higher with "house money."

Another strategy is to look for companies that have embedded assets that the stock market may begin to appreciate. In my early Wall Street days, back in 1999, this was one of the main strategies.

Think of it as buying a core operating company but then getting exposure to an exciting new emerging technology, such as the automakers or electric utilities that are also central to the theme of electric vehicles.

Ultimately, though, my best advice for a period like this is to trade a lot or don't trade at all.

Nimble traders not only survived in 1999... They thrived. Dedicated buy-and-hold investors may not have seen positive returns for a few years, but eventually they saw huge ones.

Just don't be caught in the middle.

Regards,

Enrique Abeyta

Editor's note: Enrique says you can bet that 2021 will see massive volatility. And during periods of heightened market volatility, people panic, which is great news for one of his favorite trading strategies. He recently put together a video presentation detailing everything you need to know. Watch it here.

Further Reading

"The tactics that have guided our fighter pilots for the past 50 years can also help improve your trading," Enrique writes. No matter what the market does, it pays to have a plan and stick to it. Check out the four steps to consider when trading today: Trade Like a Fighter Pilot.

"The vast majority of investors underperform the market," Enrique says. Looking for huge upside involves being extremely selective. And these four rules can help you identify major opportunities in the market... Read more here: Follow These Four Easy Rules to Become a Better Investor.

Market Notes
TRAVEL OPTIMISM IS A GOOD SIGN FOR THIS HOSPITALITY GIANT

Today, investors are looking ahead to the travel industry’s recovery…

The COVID-19 pandemic has prevented many people from traveling. But as vaccines begin to roll out across the globe, folks are starting to plan for future trips… eager to splurge on long-awaited vacations. The American Hotel & Lodging Association recently found that 56% of Americans are likely to travel this year. And one stock is rising as demand continues to build…

Hilton Worldwide (HLT) is a $35 billion hotel giant. With more than 6,400 properties in 119 countries and territories, its popular brands include Embassy Suites, Waldorf Astoria, and its flagship brand, Hilton Hotels & Resorts. The company is still taking losses today. But as more folks get vaccinated, Hilton is making sure it’s prepared for a future surge… The company opened more than 400 hotels last year, reaching the mark of 1 million rooms in the fourth quarter.

As you can see, HLT shares have soared. They’re up nearly 110% since last year’s lows… And they recently hit a fresh all-time high. Investors are betting that the travel industry’s woes won’t last forever…