Source: http://stockbee.blogspot.com/2007/07/how-to-trade-ipos.html
25% of the stocks in Double Trouble universe have IPOed in last 2 years. Trading IPO's can be profitable for variety of reason. As the universe of stocks to watch in IPO is small, it is easier to catch such IPO's. There are 3 traders I know, who only trade IPO's. By specializing on a narrow segment of the market they get in to all good IPO moves.
Recently I had lunch with one such trader, she had 90% return last year trading only IPO's. There is another trader who specializes in trading IPO's and is regular reader of the blog. From time to time he keeps sending me detailed analysis on IPO's and which one are likely to move. After chatting with these IPO specialist I have learned a lot on trading IPO's and has incorporated their learnings in to trading. One of them has requested me to incorporate IPO as subsection in Opportunity Buffet and which I will do in a day or two.
So what works in IPO's according to these veterans and my experience:
1 IPO's with good earnings or sales growth. This is number one criteria to look for. If an IPO has good IBD ratings I pay special attention to it.
2 IPO underwritten by Goldman Sachs, Morgan Stanley, Merrill Lynch or Credit Suisse
3 IPO's which IPO during market weakness. They really do well. Because unless the company is really solid, who would buy during market weakness. e./g. companies like Coach, it IPOed in the darkest period and went on to great height.
4 IPO's which do not go down more than 35% below first day trading close
5 IPO's with spin offs
The best way to trade IPO is by just running a simple 4% plus breakout scans.
(100*(c-c1)/c1)>=4 and v>=1000 and v>v1
Generally breakout on IPO's have follow through.
The IPO's which do not do well in first year become part of my Virgins strategy.
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