initial public offerings (IPOs) trading on American exchanges

Tuesday, March 18, 2014

New IPOs - when to buy?

RetailMeNot (SALE) operates a digital coupon marketplace. Unlike some IPOs, the company is turning annual profits. Earnings grew from 4 cents a share in 2010 to 34 cents, 52 cents and last year 61 cents a share. The Street expects EPS to pop 77% to $1.08 a share this year on 29% sales growth.

The stock cleared a 39.60 buy point in a cup base on Feb. 10. Volume was 244% above average. By Feb. 27, the stock rose as much as 23% above the buy point. When a stock rises 20% above the buy point in three weeks or less, it triggers the eight-week hold rule. However, the same day it hit the 20% level it reversed lower and closed low in the day's range.
What is an investor to make of that?

The next day RetailMeNot plunged more than 15% intraday. The hold rule was superseded by another rule: Don't let a winner cycle into a loss. So a disciplined investor should have been out of the stock with a small profit.

On Monday, the stock plunged further but rebounded in strong volume after a descent near the 10-week moving average. Arguably this could be regarded as establishing a new buy zone. The weekly volume on last week's decline was strong, but not nearly as strong as the volume in the two weeks ended Feb. 7 and 14, when it broke out.

Can an investor buy now off the 10-week line? Yes, but the conventional buy zone up to the previous high of 48.73 appears to be a stretch. Getting in well below that level would be prudent.

Flash sale retailer Zulily (ZU) turned profitable in 2013. A December breakout from an IPO base at 41.42 failed in January, triggering the 8% sell rule.

The stock then worked on a double-bottom base. The pattern actually turned into a shakeout + 3 with a 40.14 buy point (the first low at 37.14 plus 3 points). Volume — often a hard read on an IPO — appeared soft on the breakout.

Thanks to a post-breakout gap up, the stock is far extended.

What to do now? Watch for a new entry, perhaps a three-weeks-tight or short stroke or even a new base. Sideways action that shapes a flat base would be ideal. But if no new entry develops, investors must do their fishing elsewhere.

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