How to Pick the Right IPO Stock

Photo of author

By Jacob Maslow

Thanks to sky-high valuations and the great experience investors have had so far with Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR), there are a lot of companies going IPO. The problem with the IPO market is not so much on freedom of choice. There are just so many to choose from. In fact, the problem is on freedom from choice. You wish that somebody could cut down all your choices for you so that you can zero in on the companies that are worth your time and money.

The good news is that, despite the huge number of stocks out there and the hype and buzz surrounding them, there are really only a handful of IPO stocks you should ever think of risking your hard-earned money on. Instead of simply telling you the name of these companies, I am doing you a bigger favor by teaching you the analysis that you need to adopt, to clearly identify potential market winners.

Market Dominance

When looking to buy into an IPO, determine whether or not the company is a dominant player in their market. If that company isn’t at least number 1 or number 2, forget about that stock. That is unless, of course, that stock has some sort of buzz or technology that may make it worth your while. Regardless, if it is just an also-ran or a distant competitor, don’t give it another second of your time.

Sexy Industry

This is where many IPO stock investors screw up and fail. They think that just because a stock is dominant in its market and commands the lion’s share of the market, it is good to go. No. You can find stocks that are producing profit year after year, are growing like gangbusters and basically own their industries. However, when you look at their stock performance, it is cracking sideways. They are not making any progress. Why? They are in a very boring industry.

So another key factor in trying to determine an IPO stock winner is to determine how sexy the industry is. Social media, internet stocks, mobile app stocks, and anything with technology is sexy. Biotechnology is also sexy.

Solid Track Record of Growth

Another key factor you should look into is whether or not the company has been growing on a sustained basis. You don’t want to gamble with a company that hasn’t been growing and is waiting to go IPO for it to grow. That is just too much of a risk. Instead, look for encouraging signs of growth. This is one key factor that drove many people to invest in Twitter. It remains to be seen if Twitter can maintain that growth. Regardless, you should pay attention to growth because this can impact the momentum of the price of the stock you purchase.

Images Courtesy of DepositPhotos