IPO Stocks: When You Want to Get In on Great Companies Early

Are you interested in early investment opportunities like Splunk, ServiceNow, Palo Alto Networks, and Oaktree Capital Group?

Apr 24, 2014 at 4:45PM

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some IPO stocks to your portfolio but don't have the time or expertise to hand-pick a few, the Renaissance IPO ETF (NYSEMKT:IPO) could save you a lot of trouble. Instead of trying to figure out which IPO stocks will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. This ETF, focused on IPO stocks, sports an expense ratio -- an annual fee -- of 0.60%. The fund is small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF of IPO stocks is too young to have a meaningful track record to assess. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why IPO stocks?
Why invest in IPO stocks? Well, it's actually quite reasonable to avoid them, since on average, newly public stocks tend to underperform. Still, some do quite well, and sometimes it's best to invest a little after they debut. This ETF focuses on stocks that are relatively newly listed and keeps them for up to two years.

More than a handful of IPO stocks  had strong performances over the past year. Splunk (NASDAQ:SPLK) surged 58%, for example. The software specialist operating in the Big Data arena already has a market cap north of $7 billion. Its services are pricier than some of its peers, and it's not growing quite as briskly as some, but its fourth quarter still featured revenue up 53% over year-ago levels, topping expectations. Splunk has been growing in part via acquisitions and signing some significant customers. Calling the stock overvalued, with its price-to-sales ratio near 23 (compared with an average of 1.7 for the S&P 500), is not unreasonable.

ServiceNow (NYSE:NOW) jumped 48% over the past year. The company provides cloud-based enterprise IT automation services and also appears a bit pricey with a three-digit forward-looking P/E ratio. Still, compared with some peers, it seems the most appealing for long-term investors, based on its order backlog and valuation, among other things. It just reported its first-quarter results, meeting earnings expectations and topping revenue projections with a 62% year-over-year increase. Management noted, "We also continued to penetrate our existing customer base, with upsells comprising 34% of our annual contract value signed in the quarter and revenue per customer of $241,000, an increase of 22% from the same period last year."

Palo Alto Networks (NYSE:PANW) gained 34% over the past 12 months. The networking and security specialist has also been growing briskly, with second-quarter revenue rising 46% above year-ago levels. Last month, FBR Capital upgraded the stock to outperform, citing "faster-than-expected adoption of Palo Alto's appliances/services and a more productive sales force," among other factors. Meanwhile, Palo Alto Networks is buying the Israeli cybersecurity firm Cyvera for about $200 million; the acquisition is expected by some to expand its addressable market opportunity by as much as 25% to 33%.

Other IPO stocks didn't do quite so well over the last year but could see their fortunes change in the coming years. Oaktree Capital Group, LLC (NYSE:OAK) advanced 18% and yields a whopping 7.3%. It's a global investment management firm, specializing in alternative markets (think distressed debt and high-yield bonds). Analysts at TheStreet.com have rated the stock a sell, citing poor profit margins and a profit-margin pullback, among other things. It still has promise, though, in part due to lots of impressive customers, such as dozens of pension plans and state governments. Bulls also like its investing star, Howard Marks. The company reports its first-quarter results on May 1.

The big picture
If you're interested in adding some IPO stocks to your portfolio, consider doing so via an ETF. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

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Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Oaktree Capital. It also recommends Palo Alto Networks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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