Comfort is a double-edged sword.
On one hand, comfort is a reward for a job well done. A chance to sit back on one’s laurels and take it easy for a while, secure in the knowledge that your job, income, investments, etc., will take care of themselves.
On the other hand, comfort breeds sloth. It invites a level of overconfidence and carelessness that can be devastating to your job performance, income streams and investments, if allowed to fester.
Like many investors, I’ve grown a bit too comfortable this year. Not only have I been loath to leave the comfort of my home office and my daily routine, I’ve grown way too accustomed to markets hitting all-time highs every other week.
This week, I’m shaking things up a bit. I’m writing to you from a cozy little cabin in the Smoky Mountains just outside of Gatlinburg, Tennessee. I’m sitting at a stylized log-cabinesque kitchen table as my family enjoys the outdoors in a cold mountain stream right behind our back door.
With the change in setting comes a change in perspective. We’ve become too accustomed to riding the coattails of big-name tech companies in 2017. As I noted last week, market leaders like Facebook Inc. (Nasdaq: FB), Alphabet Inc. (Nasdaq: GOOGL) and Microsoft Corp. (Nasdaq: MSFT) might be all that stand between us and a major market correction.
When It Comes to IPOs, It’s Quality Over Quantity
Investors were scared off from the initial public offering (IPO) market early in the year. It’s not hard to see why. Both Snap Inc. (NYSE: SNAP) and Blue Apron Holdings Inc. (NYSE: APRN) were extremely hyped heading into their respective IPOs, and both turned out to be abject failures for investors.
Another issue that investors have clung to is the diminishing number of IPOs. Since 1996, the number of companies going public dropped from more than 8,000 to about 4,400 last year. That number is expected to fall even further in 2017.
The latter issue can be attributed to a wealth of funding from private offerings — due to the current easy-money environment from the Federal Reserve — and a wealth of red tape. In fact, the head of the U.S. Securities and Exchange Commission (SEC), Jay Clayton, and the president of the New York Stock Exchange, Tom Farley, said that they believe regulations are the No. 1 reason for the decline in IPOs.
But if red tape was really the issue, no company would ever go public.
In fact, the problem with this year’s class of IPO offerings has been quality, not quantity. Snap emerged on the scene only to be copied heavily by Facebook and every other social media company on the market. Blue Apron, meanwhile, was smacked down by Amazon Inc.’s (Nasdaq: AMZN) acquisition of Whole Foods Market.
But when you look beyond this disappointing duo, you find that there are excellent opportunities to be had.
Roku Inc. (Nasdaq: ROKU)
ROKU stock was priced for an IPO of $14 per share. However, Investors weighed concerns about the company’s future ahead of the stock’s launch and decided that Roku has plenty of potential. The shares surged 68% in their public debut, closing at $23.50. ROKU stock has since consolidated nicely despite its ups and downs.
While concerns about content and competition remain for the set-top box maker, Roku has done more than hold its own against much bigger competitors. In fact, Roku had a 32.6% market share of America’s 150 million connected-TV users last year — ahead of Google Chromecast (29.9%), Amazon Fire TV (26.3%) and Apple TV (19.9%), according to research firm EMarketer.
Once the company starts focusing on content — and potentially its own licensed content — it’s off to the races.
Switch Inc. (NYSE: SWCH)
Data centers are big businesses … just ask IBM, Amazon and Alphabet. But legacy data centers are long overdue for disruption. That’s where Switch steps in.
The company offers ultra-advanced, high-tech data center solutions focused on security and sustainability. The company also manufactures all its own data centers using patented technologies, simultaneously increasing margins and cutting down on costs.
It’s part of the reason why SWCH stock jumped 44% during its IPO. Switch currently owns three large high-tech data centers and is developing a fourth. Furthermore, Switch’s SEC filings show that it has been profitable in every quarter of its existence, save one where it paid $27 million to unbundle its power use from Nevada’s grid. This level of profitability and growth should be music to investors’ ears.
Coming Down the Pike
As with most IPOs, SWCH and ROKU will bounce around for a while, providing opportunities for those who missed out on the initial surge. But if you are looking to get in on the ground floor of an IPO later this year, there is at least one “do” and one “don’t” to keep in mind.
Do consider database specialist MongoDB. Why? The company operates what is called a NoSQL database that is poised to disrupt old-school database firms like Oracle and Microsoft. While this may not sound flashy, MongoDB makes the most popular NoSQL software on the market.
Don’t consider HelloFresh. Why? HelloFresh is basically another meals-to-order company like Blue Apron. The firm claims that its IPO will be different than Blue Apron’s, but the business model is essentially the same. What’s more, the real reason that Blue Apron is struggling — Amazon’s Whole Foods acquisition — continues to be the 400-pound gorilla in the room for this market.
Remember, trading IPO stocks can be a risky bet, but it can also be quite rewarding. After all, you have to take a few chances here and there to keep your portfolio fresh.
On a side note: I took a break in writing today’s article to go for a quick hike, and got to see a black bear mother and her cubs playing from about 500 feet away. Risky? Yes. Rewarding? Most certainly.
Until next time, good trading!
Assistant Managing Editor, Banyan Hill Publishing
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Source: Banyan Hill