Opinion: Robinhood users get access to three IPOs this week – before you buy, beware of these facts

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Good news for those looking to buy stocks on the IPO: Robinhood is back in the mix.

After a two-month lull since its initial public offering at the end of July, the online broker is now offering clients access to three IPOs scheduled to launch over the next two days (23-24 September ).

Robinhood HOOD,
+ 4.30%
offers a chance to: Ethically sourced jewelry company Brilliant Earth Group BRLT,

; medical diagnostic company Cue Health HLTH,

; and Argo Blockchain ARBK,
,
a British bitcoin miner.

Personally, I make requests for all three. They appear to be good companies. But the truth is, I don’t expect to make a ton of money with them, even assuming I get stocks. Robinhood’s allowances have been pretty meager. On the bright side, by my calculations, Robinhood’s IPOs have performed well so far.

Call me idealistic, but I also think it’s important to be part of the cause of “democratizing investing,” Robinhood’s stated mission. I also like to experience Robinhood’s IPO process to see firsthand how it works.

Here’s what I’ve learned so far – the good and the bad.

Aadvantages

First, Robinhood does not require a minimum account balance to participate, unlike some online brokerages. It plays in the mind of Robinhood. Bringing IPOs to the masses is part of its mission to “democratize” the stock market. In contrast, for years you had to have a large account at a large brokerage house to be rewarded with access to the IPO. (Robinhood also paved the way for commission-free transactions.)

Next, despite the skepticism of at least one market veteran (more details below), the quality of Robinhood’s deal has been solid. The seven IPOs he has offered since the end of May were up 30% at the end of trading on September 17. For the context, this is much better than the gains of 5.4% for the S&P 500 SPX,
+ 1.13%,
the flat returns of the Dow Jones Industrial Average DJIA,
+1.26%,
and the 1.4% drop for the Russell 2000 RUT,
+1.67%.

These IPOs delivered a nice first day pop of 27.6% on average. That’s well above the 18.4% average day one gain for IPOs between 1980 and 2020, according to finance professor Jay R. Ritter at the University of Florida. But it lags behind the 32% day one pop average for the 294 IPOs so far this year, as calculated by Renaissance Capital, which manages the Renaissance IPO ETF IPO exchange-traded fund,
+1.32%.

Still, not bad.

The big winners are Clear Secure YOU,
+ 3.19%,
a secure identity platform; Duolingo DUOL,
+1.62%
in language training; and FIGURES FIGURES,
+ 2.20%
in care clothing. They are up 35.2%, 81.4% and 87.3%. To round out the winners, Riskified RSKD,
+ 4.12%
in fraud prevention software is up 29%, and Robinhood is up 11.5%.

The least efficient are Outbrain OB,
+ 1.24%,
an online advertising management platform; and F45 FXLV Training,
+ 2.60%
in fitness, down 22.7% and 12.5%.

Disadvantages

The biggest problem with Robinhood’s IPOs is that you only get a very small slice of the pie, if anything at all, other than the shares of its own IPO. I’ve only gotten a small portion of the IPOs I’ve done so far. On the one hand, I have nothing at all. And it’s not just me. Robinhood uses an algorithm to randomly assign actions, but the algo doesn’t have a lot to work with.

“The brokerage’s IPO allocations have been insignificant to date,” says Matthew Kennedy of Renaissance Capital (aside from his own IPO). Allocations reach “up to” 1% to 3% of transactions. That’s just a few million dollars worth of stock for its tens of millions of users, Kennedy says.

Here is another problem. Almost half the time, you would have been better off waiting for the IPOs offered by Robinhood to turn into failed IPOs, and then buying them cheaper, in the market. Failed IPOs are IPOs that trade below their IPO price. This happened 43% of the time (three out of seven) for Robinhood’s IPOs.

In a way, it’s better than the IPO market as a whole. As of September 20, 53% of this year’s IPO crop was trading below their issue price, according to Renaissance. But in the last 90 days – roughly the time that Robinhood has offered IPO shares – 41% of IPOs are trading below their issue price. It’s comparable to what happened with Robinhood’s IPOs.

This is no small problem. Suppose you buy an IPO through Robinhood and the IPO turns into a failed IPO. Not only could you have gotten a better price, but you’re stuck in the position for 30 days. Otherwise, you are violating Robinhood’s rollover policy. Then you are stuck on IPO access for 60 days.

In other words, by buying through Robinhood, you gave up some freedom and got nothing in return. Robinhood did not respond to requests for comment.

The good news is that getting stuck with “failed IPOs” is happening less than you might think – given the skeptical view of IPO access among market veterans. Kevin Landis, who manages the outperforming Firsthand Technology Opportunities Fund TEFQX,
+ 0.42%,
proposes this rule of thumb. “If you can get an allowance, you don’t want it. And if you can’t get an allowance, you want as much as possible, ”he says.

However, in the current climate, this rule might not apply.

Professional investors are overwhelmed with so many offers that they find it difficult to study them all, says Avery Spear of Renaissance Capital.

“We see companies launching on Monday and trading on Friday. It doesn’t leave enough time to analyze each transaction, ”she said. “Big investors may not be confident about going into something they can’t analyze.”

In other words, getting an allowance these days doesn’t necessarily mean it’s a bad business.

“Road shows are shortened,” says Todd Skacan, director of equity markets at T. Rowe Price. “This cuts down on the time investment staff can devote to their work. “

This week’s harvest

The three IPOs offered by Robinhood this week look promising. Here’s a quick rundown.

Brilliant Earth Group

First-half sales rose 77.7% to $ 163 million at the ethically-sourced jewelry business. Net income was $ 10.8 million, compared to virtually nothing the previous year. The company says it makes sure its diamonds and gold don’t come from mines where workers work in horrible conditions. These fundamentals align with the values ​​of many millennial and millennial jewelry buyers. Brilliant Earth is run by founders, which is often a plus for investing. Brilliant Earth also sells synthetic diamonds, which is not such a crazy idea. Charles & Colvard CTHR,
+ 3.33%,
a company I suggested on this topic in my Brush Up on Stocks stock letter (link is in bio, below) in early December 2020 at around $ 1.20, recently rose 138% to trade at $ 2.86.

Health index

Sales of home diagnostic kits reached $ 202 million in the first half, down from zero the year before. Net income was $ 32.8 million compared to a loss of $ 19.2 million. Growth has been strong due to demand for Covid-19 tests. Now, the company plans to expand into respiratory health, sexual health, heart and metabolic health, and chronic disease management testing. Several of these tests should be approved by the end of 2022, the company predicts. This is also managed by the founder.

Argo block chain

Sales rose 79% in the first six months of this year to £ 31million and net profit rose to £ 7.2million from next to nothing – largely due to the growth in bitcoin mining capacity. Today, Argo is developing a new mining facility in Texas. A big risk is that you are exposed to bitcoin BTCUSD,
+ 5.73%
volatility. Not only because it’s the deal, but also because Argo eats his own cuisine. A quarter of its assets are cryptocurrencies.

Michael Brush is a columnist for MarketWatch. At the time of publication, he owned HOOD, RSKD, OB, FXLV, and CTHR. Brush suggested HOOD and CTHR in his stock newsletter, Refresh actions. Follow him on Twitter @mbrushstocks.


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