New IPOs - when to buy?

Brand-new IPOs may offer future potential, but they can be tricky to navigate in the short run.

Those that go public with much fanfare often see a big, first-day pop, like LinkedIn (LNKD) (109%) and Twitter (TWTR) (73%), before coming back down to earth. That can make finding an entry tough, since a hot stock could keep shooting higher or drop right after the debut, a la Facebook (FB).

That's why it may be prudent to wait for a consolidation. Some IPOs pause shortly after their debut. A so-called IPO base can be shorter in length than the five- or six-week minimum, respectively, for a flat or cup base.

Michael Kors (KORS) trended mostly higher the first five sessions after jumping 21% its first day, Dec. 15, 2011. It then paused the next three weeks, giving prospective buyers a chance to get in. The first true base didn't start until March.

Coupons.com (COUP) surged 88% to 30 from its offer price on March 7. It hasn't done much since, trading mostly between 26 and 31. The Mountain View, Calif.-based digital coupon provider hasn't yet turned an annual profit, though it posted its first quarterly profit in Q4.

Its debut comes nearly eight months after that of rival RetailMeNot (SALE), which rose 32% from its IPO price and is now up more than 30% from that day's close. It had rallied as much as 76%. The company has made money since 2010.

YY (YY), which went public on Nov. 21, 2012, shows the potential of recent new issues. It saw a modest 8% rise in its Nasdaq debut. Shares climbed 35% in the first two weeks before launching into their first consolidation, which spanned seven weeks and offered a first chance for investors.

Another 36% advance ensued before the Chinese Internet stock settled into a six-week cup base, a second opportunity to buy. It cleared its most recent six-week consolidation on Jan. 3 and is up 42% from the buy point.

YY has grown its annual earnings per share the past two years. Earlier this month, it crushed fourth-quarter profit and sales forecasts with triple-digit gains. Analysts expect triple-digit EPS growth to continue in Q1.
The top- and bottom-line performance have helped it attract increasing institutional sponsorship. Forty-three mutual funds and hedge funds took new positions as of Dec. 31, while 23 added to their stakes. Three of the funds owning shares are rated A+.

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.