Over nearly 57 years, Cabot has been here helping individual investors, and in the nearly 20 years I’ve been running Cabot Growth Investor, we’ve continued to hone our stock selection system to give us the best chance of finding winners. Specifically, fundamentally, looking for a great story and good numbers (sales, earnings, margins) is key, as it entices big investors to build big positions over time.
But I also need to see a good chart, which generally means one that’s trending higher and outperforming the market, usually trading at or near new price highs. While counterintuitive, your leading stocks are usually the ones that are hardest to buy—the stocks that don’t pull back or lag out of the gate, instead spiking higher as big mutual, hedge and pension funds pile in.
However, initial public offerings (IPOs) are often different ducks—while you still want a good combination of a strong fundamental story and great numbers, the chart aspect of the equation is different. As it turns out, most IPOs have a good-sized droop after coming public, and that’s especially true of overhyped ones.
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Consider the statistics from The Lifecycle Trade, which I wrote about in Growth Investor in mid-June: When looking at thousands of IPOs in recent years, it turns out a full 55% of IPOs will fall at least 10% below their day-one low (that is, the low set during the first trading day of the stock) within nine weeks. And another separate study looked at most of the big IPOs of the past 20 years (Facebook, Alibaba, Spotify, Airbnb, etc., etc.)—the average maximum drawdown (from high to low) in the first year was a whopping 55%!
Even for the best companies, then, a big post-IPO droop is the norm after coming public, whether it happens right away or after a few good weeks. But, obviously, many IPOs do end up getting going in a big way—indeed, the new issue list is something I keep a close eye on, as new issues often (eventually) morph into new leadership.
Thus, while breakouts to new highs can work for IPOs, you can often grab some earlier entries by looking for bottoming action—which usually means a few weeks of supporting action followed by some legitimate signs of accumulation.
Snowflake (SNOW) from back in 2020/2021 was a good example: After a nice-looking breakout in November, shares quickly found resistance and plunged more than 50% over the following six months. But then note the three big weekly accumulation bars after a shakeout to new lows—that kicked off a tradable multi-month run.
The reason I’m writing about all of today is because a couple of high-profile recent IPOs are showing intriguing action after big declines: SpaceX (SPCX) and Cerebras (CBRS).
SpaceX (SPCX) seems like every bear’s favorite stock to hate these days, with a still-lofty valuation, a bottom line that’s in the red and an initial lockup expiration (insiders could begin selling some shares on August 6) that just occurred. But the chart itself suggests big investors are building positions after its big post-IPO fall: I count nine total support/accumulation days over the past three weeks, highlighted by (ironically) a huge-volume rally after the lockup expiry last week, which came after what now looks like a shakeout after the Q2 report.
Then there’s Cerebras (CBRS), a super-fast-growing AI chip firm that actually designs huge interconnected wafers that dramatically speed up communications for AI training and other applications. The stock fell more than 50% from its day-one high, with support near 160 being repeatedly defended and with many, many higher-volume buying days showing up of late, and with the stock itself sitting just below resistance near 250. Earnings for CBRS are due tonight (August 12)—a big upmove, if it happens, would be intriguing.
The bottom line here is that IPOs are a great place to look for new leadership, and these two rapidly growing names are showing signs of bottoming out after big post-IPO declines—a clue that institutional investors are building positions.
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