There are only so many times in your life that you literally fall out of your chair in reaction to the sheer lunacy of what you're reading. You're left to wonder if the words in front of you are some kind of elaborate prank from the folks at The Onion, or if the world has just gone crazy.
Today is one of those times. UBS announced it's creating an ETN, or exchange-traded note, focusing solely on recent Internet IPOs. You know, the kinds of stocks whose price-to-sales ratios are higher than most companies' price-to-earnings ratios; the ones that are wildly pushing for IPOs to cash in on a market that's suddenly become crazed for all things dot-com.
All arguments of whether these stocks are overpriced aside, the key fact that no investor can deny is that there are tremendous amounts of risks to the rash of recent IPOs. Many need transformative leaps just to justify their current valuation. Yet, UBS' ETN ... it comes with leverage.
Yes, the folks at UBS have outdone themselves and created an ETN around one of the riskiest areas of investing and doubled the risk for you. Surely we owe them some kind of gift basket for this wondrous offering to a world already in the difficult process of deleveraging and reducing risk.
Dear future, meet past
As saddened as I am by seeing this product -- a completely unnecessary means for piling on risk where it's not needed -- I'm hopeful. At the Fool, we've emphatically sided with the idea that investors can beat the market, and a large part of that is based on the irrationality seen every day. I'm talking about the short-sightedness, excessive greed, and ability to repeat past investing manias that define everyday market action. If you can look past that as an investor, you have an edge to beat the market.
So today feels a bit like a child wondering aloud if Santa Claus exists, and then having Santa Claus crash through his roof moments later. We wonder aloud if the market presents opportunities through its irrationality, and then something like UBS' leveraged Internet IPO product comes out and proves the irrational market's existence. A short decade's time ago, an Internet bubble based on the same principles formed and popped with disastrous consequences. Now that we're seeing another one form, investors have conveniently forgotten the past and are clamoring for more risk.
If you need a reminder that the markets aren't always efficient, that excessive greed is alive and well, that fact just hit you over the head today like a sledgehammer.
The bottom line
Not that this is meant to be a condemnation of all IPOs in recent years. Our Rule Breakers service has identified unique business models or other advantages in several of the companies this ETN holds, like Rackspace (NYSE: RAX ) , Ancestry.com (Nasdaq: ACOM ) , and OpenTable (Nasdaq: OPEN ) . Rule Breakers' market-smashing track record over the past seven years illustrates a history of being able to pick out seemingly overpriced businesses that keep outperforming.
The broader point is that while there will be some recent IPOs that make the jump and grow into their outsized valuations, there is also a level of hysteria around newly public Internet companies right now. If you feel the need to invest in this space, a basket ETN is an extremely risky proposition. Piling on leverage is lunacy.
If you're looking for a company riding a technology megatrend that actually produces -- watch out, this is a four-letter word for recent IPOs -- a healthy stream of profits, check out this free report compiled by the analysts of our Stock Advisor newsletter. They highlight a previous recommendation that's gone on to gain 250% since first being picked in 2009. Best of all, the company is an industry leader with proven advantages that leave it set for more gains in the future. To get the report just click here; it's free!