The average IPO is up 23.1% year-to-date...
But these stocks priced their initial public offerings (IPOs) too high, setting up their shares for a steep fall once they started trading. As a result, the shares have been some of the worst performers year-to-date.
That doesn't mean you can't find some excellent deals by shopping the IPO market. Some of the high-yield IPOs I uncovered below racked up robust year-to-date gains of better than 30% and are still charging ahead.
But before you reach for the latest hot high-yield IPO, you should watch for three key inflection points that can move the price sharply up or down: the days and weeks following the IPO launch, the end of the quiet period, and the lock-up expiration.
Knowing what's happening around these three periods could potentially make you -- or save you -- a lot of money...
The IPO launch
The first day a stock goes public, its price can surge especially if the final offering price is at the low end or below the anticipated range. While the average first-day share price pop of this year's IPOs is not the 72% of 1999, it's still a healthy 14% gain in a single trading day.
Getting in on an IPO launch can be tricky, however. Not all IPOs are open to the public, and unless your broker has a good connection with the underwriters, it can be hard for investors like us to get on the IPO list.
Not to worry. Attractively priced IPOs may continue to run up in the days and weeks following the launch, as retail investors like you and me get in on the action.
For example, Northern Tier Energy (NYSE: NTI) IPO'd on July 26. The first day the MLP started trading at $14 a share, its priced popped just a few cents. But its units were priced well below the $19 to $21 range announced in a press release the week before.
When investors caught on in the weeks following the launch day, the stock really started to gain steam. The units closed a month later on August 31 at $18.30 per unit, handing a tidy 31% gain for anyone with the foresight to bet on this deeply discounted IPO.
End of quiet period
If you miss the opening weeks of an IPO, you may get another chance by buying in just before the end of the quiet period. When the quiet period ends, usually 90 days after the IPO date, investment houses involved in the underwriting can issue research reports touting the stock.
According to the Nasdaq site, Northern Tier's quiet period expired on September 4. Not coincidently, the units jumped 9% between September 4 and 5 to $19.90 after Barclays Capital initiated coverage with a price target of $20.
End of lock-up period
In contrast to the run up that can follow an IPO launch and the end of the quiet period, the shares of a newly listed stock can sell off at the end of the lock-up period.
Lock-ups prevent early investors and other company insiders from flooding the market with shares immediately after the stock's IPO. When the lock-up period ends and insiders can finally start to unload millions of shares, the sell-off can weigh on the price.
Facebook investors know all too well that the end of the lock-up period can be a volatile time to own newly issued shares. FB hit new lows, falling over 4%, a day after the first lock-up period expired on August 15.
IPOs that survive the lock-up expiration with their share price intact are the ones you want to watch. Their stability bodes well for future long-term performance.
This year's crop of high-yield IPOs
With these thoughts in mind, I scanned the income university for recent IPOs in high-yield sectors such as limited partnerships and real estate investment trusts (REIT).
Listed below are fifteen IPOs with projected yields of better than 5%, based on management's stated dividend rate or actual payments annualized.
As you can see from the chart below, I found six MLPs, four REITs, two royalty trusts, one business development company (BDC) and two common stocks.
Of the stocks listed, one of them -- Hi-Crush Partners (NYSE: HCLP) -- has a quiet expiration period coming up on Sept. 25, and could get a lift at that time. Four of them reached the end of their lock-out periods: Select Income REIT (NYSE: SIR), Home Loan Servicing Solutions (Nasdaq: HLSS), Roundy's, Inc. (NYSE: RNDY), and Whiting USA Trust II (NYSE: WHZ). Roundy's has not fared as well as the others, losing some 30% in share value in the weeks since the lock-up period expired on August 6.
Hi-Crush Partners, however, is especially interesting since it could get a second pop soon after its quiet period expires on September 25.
Action to Take --> In short, don't let the Facebook headlines fool you. This year has been full of strong performing IPOs... and some of the best have come from high-yield sectors like REITs, MLPs, and royalty trusts.
But IPO investing isn't for everybody. If you're a long-term investor, you may want to consider holding off on buying any security until the lock-up period has expired.