The splashiest IPO in a long time hit the market at 1:15 this afternoon.
Reddit (RDDT) had a successful debut, with the stock closing at $50.44 – 48% above the IPO price of $34.
There’s no denying the excitement of an initial public offering, especially a well-known company like Reddit. There’s a certain mystique about them, and the early price moves can be alluring.
Unfortunately, they are rarely get-rich-quick investments.
The first day of trading looks great more often than not, especially with buzzy IPOs. About 70% of stocks historically move higher their first day of trading.
The odds drop the second day, with only half of IPOs moving higher on day two. Of course, that means the other half fall. Talk about a crapshoot.
And the data looks bleaker further down the road. Three years after going public, almost two-thirds of stocks underperform the market, with most of those (64%) trailing the market by 10% or more, according to Nasdaq research.
IPOS are risky, unpredictable, and not worth your hard-earned money.
You could take a flyer for the entertainment value, like playing the tables in Las Vegas. But don’t invest money you need, and be prepared to lose some of it.
From my perspective as a quantitative analyst, investing in IPOs like RDDT is a bit like driving blindfolded. You don’t have the data necessary to arrive safely at your destination.
Data Snow Blindness
Reddit is the largest and buzziest social media IPO since Pinterest (PINS) debuted five years ago.
Pinterest has a Quantum Score of 53.5 in my Quantum Edge system, which I designed to find the best stocks to invest in by analyzing the data that most reliably predicts future profits. That’s below my target buy zone of 70 to 85.
Source: TradeSmith Finance and MAPsignals.com
Here’s Reddit’s Quantum Score: [error].
Reddit doesn’t have a Quantum Score. It doesn’t have the data necessary to produce a score.
We can find some data in Form S-1, which every company must file with the Securities and Exchange Commission (SEC) before going public. It includes information about finances, management, the company’s plans for the money that will be raised, and more.
But it’s not enough.
I worked long and hard developing my Quantum Edge system, identifying the most important factors in determining a stock’s potential and then writing the right algorithms to analyze those factors the right way.
My system identifies the most promising stocks based on three cornerstones:
- Superior fundamentals
- Strong technicals
- Big Money inflows
It’s hard to evaluate stocks when that data doesn’t exist. That’s why I feel like I’m driving blindfolded without it… and why IPOs are too often a crapshoot.
For instance, a company’s sales and earnings growth strongly impact its stock price. My system analyzes sales and earnings over one and three years because I found those critical to forecasting future price movement. Can’t do that with Reddit.
When analyzing the technicals – not technical analysis, but the mechanics of how a stock is trading – some of the most predictive data points relate to 52-week highs, moving averages, one-month, and year-to-date performance. Diving further in, stochastics measure a stock’s internal momentum, and the most reliable reading involves one full year.
And in terms of Big Money inflows, we simply can’t know it until we see it.
For all those reasons, I simply don’t do IPOs. I don’t even consider them until they’ve traded for at least a year, and I can have higher confidence in the data and the analysis.
That one-year period often gets us past most of the gut-wrenching turmoil typical of early trading. And if the data lines up, we have plenty of time to make our money.
Here’s the Better Way
Reddit’s IPO had me thinking back to Facebook’s (now Meta Platforms) IPO nearly 12 years ago. It was one of the most widely anticipated IPOs any of us could remember.
It’s still the largest IPO for a U.S. technology company, and the third-biggest U.S. IPO behind Visa (V) and General Motors (GM).
The hype was through the roof – what better company to have a hyped up IPO than a social media company? – and the debut didn’t exactly go off without a hitch. Shares of what were then FB were supposed to start trading around 11:00 a.m. on May 12, 2012, but itchy investors endured 30 minutes of confusion and bewilderment.
And then 80 million shares changed hands in the first 30 seconds.
Then Nasdaq had to work through a “technical error” that left some investors not knowing if their order went through and at what price.
Supposedly that got all figured out, but then it was share price headaches instead of technical ones. Here’s what the first year of trading looked like…
FB shares closed at $38.23 on its first day, just a smidge above the $38 IPO price. And within three months, shares had lost almost half their value.
Meanwhile, as more data become available and my system could more reliably analyze the stock, it started rating higher. FB hit my system’s Top 20 list of the strongest stocks in the market getting bought by Big Money on Aug. 27, 2013 – so about 15 months after the IPO.
The price at the time was $39.60, just a few percentage points from where the crazy year had started.
And since then, META has gained 1,176%.
While I don’t recommend META in any of my services, I will tell you that its Quantum Score of 81 still rates in my buy zone.
Reddit’s Quantum Score doesn’t exist.
You’ll find me watching and waiting on RDDT, making my move if and when the key data supports it – and confirms that the odds of making good money are strongly in my favor.
Talk soon,
Jason Bodner
Editor, Jason Bodner’s Power Trends
P.S. There’s just no reason to buy and hope a buzzy IPO will make you money when you can put the predictive power of data behind you in so many other stocks.
Reddit may become a buy one day, but right now we have 18 stocks in our TradeSmith Investment Report portfolio that have an average Quantum Score of 76.0 – right in the target zone.
Those same 18 stocks are up 29.4% on average.
You can see why I don’t mess around with IPOs.
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