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Good news for those who’d like to buy stocks at the IPO: Robinhood is back in the mix.
After a two-month lull since its own initial public offering in late July, the online broker now offers customers access to three IPOs scheduled to launch over the next two days (Sept. 23-24).
Read: IPO market braces for 14 deals this week
Robinhood
HOOD,
offers a shot at: Ethically sourced jewelry company Brilliant Earth Group
BRLT,
; medical-diagnostics company Cue Health
HLTH,
; and Argo Blockchain
ARBK,
a British bitcoin miner.
I, personally, am putting in requests for all three. They seem like good companies. But the truth is I don’t expect to make a ton of money in them, assuming I even get shares. Robinhood’s allocations have been pretty skimpy. On the bright side, by my calculations, performance of Robinhood IPOs has been good so far.
Call me idealistic, but I also think it’s important to be a part of the cause of “democratizing investing,” Robinhood’s stated mission. I also like to experiment with Robinhood’s IPO process to track firsthand how it works.
Here’s what I’ve learned so far — the good and the bad.
Advantages
First, Robinhood doesn’t require a minimum account balance to participate, unlike some online brokerages. This plays into the spirit of Robinhood. Bringing IPOs to the masses is part of its mission to “democratize” the stock market. In contrast, for years you had to have a large account at a big brokerage to be rewarded IPO access. (Robinhood also paved the way toward zero-commission trades.)
Next, despite skepticism from at least one market veteran (more on this below), Robinhood’s deal quality has been solid. The seven IPOs it has offered since late May were up 30% as of the end of trading Sept. 17. For context, that’s much better than the 5.4% gains for the S&P 500
SPX,
the flat returns for the Dow Jones Industrial Average
DJIA,
and the 1.4% decline for the Russell 2000
RUT,
These IPOs provided a nice first-day pop of 27.6%, on average. That’s way above the 18.4% average first-day gain for IPOs during 1980-2020, according to finance professor Jay R. Ritter at the University of Florida. But it lags behind the average 32% first-day pop for all 294 IPOs so far this year, as calculated by Renaissance Capital, which manages the IPO exchange traded fund Renaissance IPO ETF
IPO,
Still, not bad.
The big winners are Clear Secure
YOU,
a secure-identity platform; Duolingo
DUOL,
in language training; and FIGS
FIGS,
in health-care apparel. They are up 35.2%, 81.4% and 87.3%. To round out the winners, Riskified
RSKD,
in fraud-prevention software is up 29%, and Robinhood is up 11.5%.
The worst performers are Outbrain
OB,
an online ad-management platform; and F45 Training
FXLV,
in fitness training, down 22.7% and 12.5%.
Drawbacks
The biggest problem with Robinhood IPOs is that you only get a very thin sliver of the pie, if anything at all, aside from shares in its own IPO. I’ve only gotten a small portion of the IPOs I’ve put in for so far. For one, I got nothing at all. And it’s not just me. Robinhood uses an algorithm to randomly award shares, but the algo does not have a lot to work with.
“The brokerage’s IPO allocations have been insignificant to date,” says Matthew Kennedy, of Renaissance Capital (aside from its own IPO). The allocations clock in at “up to” 1%-3% of deals. That amounts to just a few million dollars’ worth of shares for its tens of millions of users, says Kennedy.
Here is another problem. Nearly half the time, you would have done better to wait for the Robinhood-offered IPOs to turn into busted IPOs, and then just buy them cheaper, in the market. Busted IPOs are IPOs that trade below their IPO price. This happened 43% of the time (three out of seven) for Robinhood IPOs.
By one measure, that’s better than the IPO market overall. As of Sept. 20, 53% of this year’s crop of IPOs traded below their issuing price, according to Renaissance. But during the last 90 days — roughly the stretch of time Robinhood has been offering IPO shares — 41% of IPOs trade below their issuing price. That’s comparable to what happened with Robinhood IPOs.
This is no small problem. Suppose you buy an IPO through Robinhood and the IPO turns into a busted IPO. Not only could you have gotten a better price, but you are locked into the position for 30 days. Otherwise, you violate Robinhood’s flipping policy. Then you get locked out of IPO access for 60 days.
In other words, by purchasing through Robinhood, you gave up some freedom and got nothing in return for it. Robinhood didn’t respond to requests for comment.
The good news is that getting stuck with “busted IPOs” happens less than you might expect — considering the skeptical take on IPO access among market veterans. Kevin Landis, who manages the outperforming Firsthand Technology Opportunities Fund
TEFQX,
offers this rule of thumb. “If you can get an allocation, you don’t want it. And if you can’t get an allocation, you want as much as possible,” he says.
However, in the current climate this rule might not apply.
Professional investors are swamped with so many deals, they have trouble studying them all, points out Avery Spear, at Renaissance Capital.
“We are seeing companies launch on Monday and trade on Friday. It does not provide enough time to analyze every single deal,” she says. “Larger investors may not be confident about going into something they can’t analyze.”
In other words, getting an allocation these days doesn’t necessarily mean it’s a bad company.
“Road shows are shortened,” says Todd Skacan, equity capital markets manager at T. Rowe Price. “It compresses the amount of time investment staff can do their work.”
This week’s crop
The three IPOs Robinhood offers this week appear promising. Here’s a quick look.
Brilliant Earth Group
Sales grew a robust 77.7% in the first half of the year to $163 million at this ethically sourced jewelry company. Net income came in at $10.8 million, compared to virtually nothing the year before. The company says it makes sure its diamonds and gold do not come from mines where workers toil in horrible conditions. These core principles align with the values of many millennial and Gen Z jewelry buyers. Brilliant Earth is founder-run, often a plus in investing. Brilliant Earth also sells synthetic diamonds, which isn’t such a crazy idea. Charles & Colvard
CTHR,
a company I suggested on this theme in my stock letter Brush Up on Stocks (the link is in bio, below) in early December 2020 at around $1.20, was recently up 138% to trade at $2.86.
Cue Health
Home-diagnostic-kit sales grew to $202 million in the first half of the year compared to zero the year before. Net income rose to $32.8 million compared to a loss of $19.2 million. Growth has been strong because of demand for Covid-19 tests. Now the company plans to expand into tests in respiratory health, sexual health, cardiac and metabolic health, and chronic disease management. Several of these tests should be approved by the end of 2022, predicts the company. This one is also founder-run.
Argo Blockchain
Sales grew 79% in the first six months of this year to 31 million British pounds and net income grew to 7.2 million British pounds from virtually nothing — largely because of growth in bitcoin-mining capacity. Now Argo is developing a new mining facility in Texas. A big risk is that you are exposed to bitcoin
BTCUSD,
volatility. Not only because that’s the business, but also because Argo eats its own cooking. A quarter of its assets are cryptocurrency.
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned HOOD, RSKD, OB, FXLV and CTHR. Brush has suggested HOOD and CTHR in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.
