The IPO market is really beginning to catch fire with the tech industry partying like it’s 1999.  The party lights glowed and the DJ began spinning the beats before the LinkedIn (LNKD) IPO a couple weeks ago and the party will continue reaching a feverish pitch with a Groupon (GRPN) IPO.  I mentioned in my blog post about the LinkedIn IPO that others would soon follow (particularly Groupon, Facebook and possibly Twitter) on the heels of the massive success of LinkedIn and that appears to be happening.  Groupon announced today that it has filed for an IPO and hopes to raise $750 million.  If the LinkedIn deal is any indication, the Chicago based daily deal company could raise well north of $1 billion in an IPO.

These recent high profile SEC filings, which would included Pandora’s announcement that it’s IPO is imminent further increases the chatter about a tech bubble about to burst which could also potentially signal the top of this meteoric market rise off the March 2009 bottom.  Why?  Following the market crash in 2000 and 2008, the IPO market was reduced to only those companies that were for the most part showing decent profits.  As the IPO market catches fire again, you have internet companies that are far from profitable trying to cash in as investors and traders themselves try to cash in on the “next big thing.”  There’s no doubt Groupon is a hot commodity and its growth is staggering.  We’re talking about a company that did $30 million in revenues in 2009, then hit over $700 million last year.  There is one problem though.  This is a company also burning through a staggering amount of cash to the tune of over $$400 million last year.  The red ink floodgates are still open this year as the company lost over $100 million in the first quarter.  Pandora is also still swimming in red ink after 10 years in business. 

Despite the heavy losses I think we can expect another impressive opening for Groupon and to a lesser degree Pandora.  The party can continue longer than we think and may not reach a peak until the Facebook IPO comes to fruition.  As I mentioned with the LinkedIn IPO post, it’s best to let these high flyer IPO’s (or any IPO for that matter) trade for a few weeks to see where the base develops.  LinkedIn (LNKD) is well off the opening high and continues to try to find the bottom of a base.  Should LinkedIn form a shallow base and breakout to new highs quickly, it could signal this hot IPO market is here to stay for awhile. 

Ok, maybe the title hints that there is going to be some secret underground tactic for how to trade the LinkedIn (LNKD) IPO, but the truth is that my secret underground tactic works for all IPO’s! Ha!  It’s not the first time I’ve revealed my strategy for trading IPO’s, but considering the biggest IPO since Google began trading today (aka the Facebook of business networking), I thought it might be a good time to revisit the tactic.

When an IPO like this hits the market the knee jerk reaction is to want to jump in as soon as it begins trading for fear of missing out on the next big thing.  Taking a look at the open today with the stock more than doubling in price and surpassing $100, it definitely appears “the fear of missing out” trade is on big time!  Jumping in on that kind of trade can be a big mistake and can often lead to large losses. 

Before I get into the trading tactics let’s take a look at why LinkedIn (LNKD) is generating such buzz.  First of all, it’s the highest profile social networking site to hit the market which in all likelihood will have Facebook and Groupon wondering whether they should hit the public market sooner rather than later.  I’m sure investors and execs at both companies are seeing the dollar signs.  LinkedIn is no slouch in the social networking world, but is still dwarfed by Facebook in terms of number of users, revenue and profit. It’s dwarfed in terms of valuation too.  Based on the secondary market, Facebook has now reached a stratospheric valuation of around $70 billion while Groupon is being valued in the $15 – $20 billion range.  I believe at the current price, LinkedIn is approaching a $7 billion valuation.

LinkedIn counts just over 100 million users and doubled revenues in 2010 over 2009 to $243 million with a net income of $15.4 million. However, the company says it does not expect to be profitable on a GAAP basis for 2011 and is forecasting declining revenues and rising costs going forward (according to Reuters).  For comparison sake, Facebook has more than 600 million users and reportedly earned $1.2 billion in revenue and $355 million in net income for the first nine months of 2010.  Now you begin to see the kind of frenzy a Facebook IPO would generate if it were to go public too. 

Many are beginning to question LinkedIn’s valuation as murmurs of another tech bubble begin to grow.  Shares were priced at 17.5 times the company’s 2010 sales (that’s BEFORE today’s parabolic move).  That compares with Google’s valuation of about six times.  Is the move justified for a company that doesn’t expect GAAP profits this year or for a company that TheStreet.com says is becoming far less useful?  Common sense would say absolutely not, but then again any of us who have been involved in the markets for some time knows that common sense and reality are often two sides of the coin.  The “fear of missing out” trade can go on longer than we think.  Does that mean you should jump on the bandwagon?  In my humble opinion – NO.

That leads me to a discussion of how best to trade IPO’s, particularly an IPO that has soared out of the gates.  In a nutshell, the best strategy is to WAIT.  You want to see where this thing settles out, or more technically, where it forms its first base… a bullish triangle, a short base, a longer cup with handle or double bottom base.  The hottest IPO’s often don’t base very long, but in my experience it’s best to wait at least two weeks from the open to get a feel of where resistance and support may be.  After two weeks, I’ll revisit the LinkedIn IPO and post a chart with my analysis along with examples from the past.  Good trading out there and do not chase this IPO!

The following article courtesy of ForexTraders.com..

“Buy on the rumor, sell on the news” is an overused phrase in the investment community, but before an investor takes this advice to heart, he should also verify the sources and confirm the validity of the messages that he receives. This last part of prudent counsel often gets lost in the shuffle of buy and sell orders, but it may be the only protection that an investor has when it comes to detecting obvious stock manipulation techniques employed by those bent on deceit.

Stock manipulation is also a favorite topic of the “talking heads” on financial news channels. Fraud openly exists, despite the efforts of regulatory and law enforcement officials to stamp it out. A sad testimony to risk management efforts is that fraud can never be completely eliminated, but must be tolerated at an acceptable level as a cost of doing business. The forex market is, perhaps, the only market we have that is less prone to manipulative tactics due to its shear volume, now at $4 trillion a day and counting. Even the largest hedge funds with their sophisticated forex trading platforms or even central bankers are unable to artificially drive the market in one direction or another, though their efforts to do so are widely publicized.

Stocks, however, are much easier targets. After Ted Cramer, the well-known television host of “Mad Money”, admitted in a 2007 interview with TheStreet.com that he was guilty of manipulating stock values during his employment days at a major hedge fund, numerous articles were written on the topic as if it were new news. His direct quote was quite telling when he stated, “What’s important when you are in that hedge fund mode is to not do anything remotely truthful, because the truth is so against your view, that it’s important to create a new truth, to develop a fiction.” The “YouTube” link to the video was subsequently overrun, but it is not difficult to locate it with a current search engine.

The “Flash Crash” last May resurrected the topic, and the report and actions taken by the SEC have not restored investor confidence. However, a recent resurgence in positive performance by the Dow, S&P 500, and the NASDAQ may have quelled a complete retreat by “401K” funds invested in stocks, but when optimism and favorable news reports abound, the circumstances that favor stock manipulation abound in lock step.

It is time once again to be wary of the following schemes designed to defraud:

• “Pump and Dump”: A typical strategy used by large position holders of OTC small business stock offerings. News headlines suddenly shout that revenues have increased 500%. A stampede ensues, prices skyrocket, and then the perpetrator unloads his position to the unwary. When the hype fades away, the stock’s value plummets like a lead balloon;

• “Short and Distort: This technique, just as illegal as the “Pump and Dump”, is employed in a Bear market. In this case, the fraudster “shorts” the stock of his target company, and then spreads a smear campaign to foster fear in the minds of current stockholders. Numerous small sell orders are executed through different brokers to signal that something may be wrong with the company. An avalanche of selling transpires, and the unscrupulous “shorter” takes his profit and runs.

There are a variety of smaller known tactics, but most deal with “penny” stocks and the market makers that support them. The only defense is to perform your own research, check the credentials for any that authors you read, and be aware that stock manipulation is a possibility.

According to the WSJ, investment bankers are beginning to discuss proposals with Groupon for an IPO.  Should Groupon go public this year it would likely be the most talked about IPO of the year (assuming Facebook holds off for another year).  Groupon already turned down a $6 billion offer from Google which in my opinion was a big mistake but some value the company now at $15 billion so what do I know.  It’s a great business model but with a low barrier to entry and I think Google will begin making a much bigger push in this space and have the infrastructure in place to do so.  The company was rumored to be looking at an IPO in the fall, but is now looking like it could happen within a couple months.  Considering the company just raised nearly $1 billion from big investors, there probably isn’t a need to rush an IPO, but at the same time the IPO environment is strong which may not be the case later this year.  Anyone smell a bubble?  Facebook $50 billion valuation, Groupon $15 billion, Twitter nearly $4 billion…

It’s been awhile since I provide an update on gold, so I thought now would be a good time to take another look at the yellow stuff.  In my last report on gold the GLD was inching closer to $130 and I thought that level would present a very difficult level and be an area where gold would stage a correction. 

A few things to point out.  For one, gold didn’t really correct, but rather digested overbought conditions with more of a sideways move (actually head and shoulders pattern) and remains in a fairly tight range above the $130 level, so certainly gold has held its own up here and could be poised for a move to the next major resistance level up around the $150 level (another 10% or so from current levels).

Before a move like that can take place, gold will need to move out of a possible head and shoulders top formation which is still a possibility, but hasn’t been confirmed.  We’ll need a couple healthy moves down in gold for that to happen.  Adam Hewison of Ino.com is basically on the same page.  He just did a quick video highlighting the current action in gold and will conduct a webinar tomorrow.  Watch the video and sign up for the webinar by clicking on the video image below.

To round out this update on gold, I wanted to bring in the analysis of David Banister of MarketTrendForecast.com who uses Elliot Wave Theory.  Despite the variance in the tools used to analyst the current price action in gold, I think we can all agree… the price action in gold remains in a strong uptrend.  While there are vulnerabilities that could play out, the odds favor a move to the next level of resistance which I mentioned as around the $150 level for the GLD.  David sees resistance around the same area and targets a move in price of gold to the $1480 – $1525 level.

Get David’s full analysis here

It’s been a terrific year for IPO’s here in 2010 with a surge in high quality companies coming to market.  A couple months ago I highlighted the Top 5 IPO’s, all of which are up significantly since being highlighted. I’ll probably do another Top 5 list in a month or so to include IPO’s since that report was written, but for now I wanted to highlight one IPO that I found to be very compelling – Sodastream (SODA).

Sodastream is an Israeli company that sells home carbonation and flavoring systems for.. you guessed it!  Homemade soda and sparkling water.  While I haven’t used the product myself, the idea is brilliant and rides the wave of three important trends – an increasing awareness of the need for better nutrition, a cleaner environment and saving money (in the long run).  Three simple, but powerful trends. 

The company offers over 30 flavors to choose from including the traditional flavors such as cola, to diet options, to mixers such as tonic and even an energy drink formula.  As for nutrition, the company claims its all natural flavors contain a fraction of the calories, carbs, sugar and sodium that Pepsi and Coke do.  Environmentally, you have less packaging, cans & bottles and less pollution caused by the transportation of these products.  Americans spend BILLIONS on bottled water alone!  That stat truly disgusts me especially when you consider that some of the bottled water is more polluted than tap water!  That’s a topic for another day..

===> Click Here For Your FREE Daily Sodastream Technical Analysis Report

It all looks great in theory, but is the company selling these things?  The answer is a resounding yes… to the tune of nearly $200 million in revenue over the past year.  Keep in mind 80% of that currently comes from Europe.  The company just began ramping up its distribution here in the States this summer and now sells the product at Sears, Macy’s, Bloomingdales, Williams Sonoma, Bed Bath & Beyond, BJ’s and other retailers. It will be mighty interesting to see how well the company did last quarter when it reports this Monday.

I think there can be some comparisons made to Green Mountain Coffee Roasters (GMCR) which saw its stock skyrocket in the past few years.  The company makes the single cup coffee brewers and relies on recurring revenue from the K cup packets similar to the way Sodastream will rely on recurring revenue from the CO2 tanks and flavoring.  However, people have been brewing their own coffee for many years.  Will they begin carbonating their own sodas and sparkling waters?  That is the billion dollar question and we may find out over the next few years.  For now, the company is experiencing rapid growth and the technical action is very bullish.

When I’m looking at trading IPO’s, I always let the stock trade for at least a few weeks and look for the first consolidation period.  That could be in the form of a flat base, cup with handle base or in this case a bullish triangle.  The stock broke out of this bullish formation just above $32 and hasn’t looked back.  That provided the 1st, most ideal entry point, but it offered another entry point on a break above the high around $38.  In my opinion, it’s currently too extended for a proper entry point, but would provide a good 2nd chance opportunity on a return to $38 or lower.

Disclosure: I have no position in SODA.. unfortunately.

Frederick Darren Berg, Seattle’s mini-Madoff, has now been formally charged in a massive Ponzi scheme according to the Seattle Times.  The founder of the failed Meridian Mortgage investment funds which drew nearly $350 million in investments, orchestrated yet another Ponzi scheme. He was charged today with money laundering and nine counts of wire fraud.  Prosecutors believe Berg defrauded investors in the mortgage funds out of nearly $100 million over the past 10 years by lying to investors about the health of the funds while financing a luxurious lifestyle that included yachts, private jets, a Mercer Island $8 million mansion and the funding of other business interests including luxury tour bus operator MTR.

Berg told investors in the largest group of Meridian funds their money would be used to buy properties, but it’s now clear that didn’t happen.  In order to fool the auditors, Berg apparently opened dozens of PO boxes which he listed as the addresses of fictitious borrowers allowing him to sign the confirmation letters sent from the auditors and send them back. 

Berg filed for personal bankruptcy back in July and has been cooperating.  While he hasn’t been jailed yet, hopefully he’ll be getting three squares at another big house soon.

Gold continues to run up nearly every day, enticing a growing number of johnny come lately’s to join the party.  You’ve seen the headlines.. Gold $2000, $4000/oz.  Could we see those kinds of numbers?  Maybe, but analysts that make those kinds of predictions are just looking to create publicity for themselves and publishers looking for a good headline. 

I like to take a different approach and analyze it from a supply/demand angle using technical analysis.  Late last year was my last detailed analysis of gold and I predicted that a top in gold could come at the 1200 – 1300 level.

“What I see happening is some kind of climactic run in gold over the course of a few months with  gains of 20 – 30%.  That’s not a number pulled out of a hat, but based on previous runs from previous bases.  Notice how the farther up you get into the rally, the returns diminish as the base quality deteriorates.  Take a look at any big move in a stock and you’ll see this similar pattern.  It’s reasonable to assume that the returns from this breakout will be less than what we saw with the 2007 breakout.. so somewhere around 20 – 30%.  If the price of gold gets into that 1200 – 1300/oz area I’d be looking for some major topping action!  A climax run in gold over the next few months followed by massive selling on the part of institutions may be the end of a nearly 10 year bull run in gold.” 

I expected gold would reach that level a bit earlier than it has, but we’re darn close to 1300 which happens to the next big level of resistance for gold and an area where a correction will likely take place.  It’s much too soon to call $1300 a major top in gold and we could certainly take out $1300 at some point, but now is no time to be adding to gold and for many not a bad place to take some profits off the table.

Here’s a look at the current chart of the SPDR Gold ETF (GLD).  Two important aspects of the chart to point out.  One is the fact that GLD is overbought on the weekly  chart once again.  Take a look and see what happened to GLD the last four times we hit overbought on the weekly chart.  The first time it led to a major correction of 30% in 2008 and three minor corrections since.  We’re overbought again up around the 1300 level and it’s not out of the realm of possibility to see another 30% correction to test the bottom of the channel around 95 – 100.  The second important component of this chart is that the 130 level coincides with resistance at the top of the channel (purple line)

===> You can get a free daily technical analysis of GLD here

Politics isn’t something I ordinarily get into on this blog, but couldn’t resist the gems that came from Obama’s mouth today.

“We also hoped for a chance to get beyond some of the old political divides – between Democrats and Republicans, Red states and Blue states – that had prevented us from making progress. Because although we are proud to be Democrats, we are prouder to be Americans – and we believed that no single party has a monopoly on wisdom.”

This gem of hypocrisy was stated early on today, right before he spent nearly an hour berating Republicans (John Boehner in particular) for the current mess we’re in.  So much for helping to close the divide. 

I nearly fell out of my chair today when I heard this statement:

“I have a different vision for the future. I’ve never believed that government has all the answers to our problems. I’ve never believed that government’s role is to create jobs or prosperity. I believe it’s the drive and ingenuity of our entrepreneurs, the skill and dedication of our workers, that has made us the wealthiest nation on Earth. I believe it’s the private sector that must be the main engine of our recovery.”

It doesn’t take long for him to contradict himself saying,  “We want to put more Americans back to work rebuilding America – our roads, railways, and runways.”

It gets better.. much better..

“I believe government should be lean, it should be efficient, and it should leave people free to make the choices they think are best for themselves and their families, so long as those choices don’t hurt others.”

I did fall out of my chair after that one. You have to go back 60 years to find a government as LARGE as this one… and yet another $50 billion in stimulus for infrastructure was proposed on Labor Day.  Why is that? .. well of course.. because the first gazillion has worked so beautifully. 

It’s not all bad.  The support for small business should be applauded, but it appears to be a desperation move before an election as does the rhetoric above about a leaner government who supports entrepreneurial spirit.  Why wasn’t this done earlier? 

On fiscal discipline..

Of course, they are right to be concerned about the long-term deficit – if we don’t get a handle on it soon, it can endanger our future. And at a time when folks are tightening their belts at home, I understand why a lot of Americans feel it’s time for government to show some discipline too.

Damn right!  Time for some discipline!  The only argument seems to be “well, they (Republicans) started it”.   The deficit continues to skyrocket each and every day and now a plan to throw billions more at it.  Obama defends the out of control spending, calling them investments:

“I’ll be honest – I refuse to cut back on those investments that will grow our economy in the future – investments in areas like education and clean energy and technology. That’s because economic growth is the single best way to bring down the deficit – and we need these investments to grow. But I am absolutely committed to fiscal responsibility, which is why I’ve already proposed freezing all discretionary spending unrelated to national security for the next three years. And once the bipartisan fiscal commission finishes its work, I will spend the next year making the tough choices necessary to further reduce our deficit and lower our debt.

How about making those tough decisions right now. 

We’re more than half way through 2010 and this year has seen a significant pickup in the number of quality IPO’s, so I thought I’d rank the top 10 up to this point in the year based on fundamentals.  Part I will highlight the first five, part II the next five and I’ll follow that up with a report taking a look at some of the most promising IPO’s that may begin trading in the last quarter.

Camelot Info Systems (CIS): This is the highest rated IPO that I currently track with a fundamental score of 29/30.  The company provides enterprise application services and financial industry information technology (IT) services in China. It’s the largest provider of enterprise resource planning in China and names HP, Accenture and IBM as customers.

Camelot has posted significant growth every year it’s been in business and that growth continues today despite a shaky world economy.  In 2009, they experienced EPS growth of 60% and is posting record growth again this year with an estimated 113% growth for 2010.  Revenue growth has accelerated in each of the past four quarters.

Technically, the stock remains extremely bullish, but very overbought in the shorter term.  After a month long flat base formation, the stock exploded higher Aug 18th and hasn’t looked back.  It’s up nearly 50% in under two weeks and buy volume continues to come in above average.  It’s best to look for a retracement of about 50% from the breakout point above $11, so a return to the $12 – 13 area would provide an ideal entry point.

====> Click Here For Your FREE Daily Camelot Technical Analysis

Higher One Holdings (ONE): Another top rated IPO with a fundamental score of 27/30.  Higher One is a company that provides technology and payment services to the higher education industry in the US, eliminating the need for paper work and checks.  What a novel idea!  Students are allowed to pay for tuition and other fees through credit, debit or eCheck and are provided with an FDIC insured deposit account.

Higher One is another IPO on the path of big growth, reaching profitability after its first year in business in 2006 and not looking back.  In 2008, earnings really accelerated with 225% growth over the previous year, followed by 138% growth in 2009 and 65% growth expected  this year. 

Technically, the stock has really struggled and that may offer an outstanding opportunity soon.  Out of the gates, the stock ran up nearly 30% from the IPO price of $12 but really began to fall apart this month and currently trades close to $11/share.  While it will take some time to confirm a bottom and carve out a new base, the selling pressure is beginning to subside and the worst may be over.  Definitely a top rated IPO to put on the radar.

====> Click Here For Your FREE Daily Higher One Technical Analysis

 
Financial Engines (FNGN): The 3rd highest rated IPO for 2010 is Financial Engines which provides independent, technology-enabled portfolio management services, investment advice, and retirement help to participants in employer-sponsored defined contribution plans, such as 401(k) plans.  Its services are provided directly or through one of eight retirement plan providers – ACS, Fidelity, Hewitt, ING, JPMorgan, Mercer, T Rowe Price or Vanguard.  JP Morgan sponsored services accounted for just under 20% of revenues last year.  Its customer list includes 25% of Fortune 500 companies and nearly half of the Fortune 20 companies. 

The company had been investing heavily in its automated solutions and didn’t turn a profit until last year, but did so in a big way posting an EPS of .20.  EPS Growth for this year is expected to come in at 45% and 28% for next year.  Clearly the investments they have made is paying off in a big way, so you’ll want to put this company near the top of your IPO watch list.

Technically, the stock began correcting just a few days after going public in March and is now in the process of carving out its first base.  What we have shaping up is a cup with handle base formation and a breakout above the 16.16 level would provide confirmation that the stock may be ready for a sustained move up.

====> Click Here For Your FREE Daily Financial Engines Technical Analysis

Green Dot (GDOT) comes in at the 4 spot with a very good fundamental rank of 26/30.  They are the leading provider of reloadable prepaid debit cards in the US and command a 40% market share.  The target customer is low/middle class who have trouble getting traditional checking and saving accounts.

Financially, it’s a company that has posted outstanding and consistent growth over the past five years.  Beginning with its first profitable year in 2006, growth really began to ramp with 375% EPS growth in 2007, 158% in 2008, 104% last year and 26% growth expected this year.  Yes, growth has been declining, but that’s expected for most companies that approach $100 million in revenue in a quarter.

Technically, the stock may be ripe for an entry.  It broke out from its first consolidation on August 9th running up a quick 10%.  Current market weakness has stalled the stock a bit and it has retraced much of that move providing a 2nd chance opportunity. 

====> Click Here For Your FREE Daily Green Dot Technical Analysis

SPS Commerce (SPSC) rounds out part I of this top IPO report in the 5th spot with a good fundamental rank of 25/30.  The company is a leading provider of on-demand software as a service for supply chain management solutions worldwide. 

This is another IPO company that recently turned to profitability.  Following losses in 2004 – 2008, it posted its first profitable year last year with an EPS of .12.  EPS is expected to more than double this year before moderating a bit in 2011.  All in all, a solid company that may be a buyout target at some point.

Technically, the stock has been correcting following an impressive open in April.  It remains mired in a long downtrend, but is beginning to show signs of stabilizing.  In my opinion, it’s too soon to consider an entry since the downtrend remains, but in another month or so, it may emerge from a downtrend and offer a real nice entry point.

====> Click Here For Your FREE Daily SPS Commerce Technical Analysis