Daily Issue, Profit Pregame

What You Need to Know to Avoid a Common Investing Pitfall

Don’t Let the Hype Sink Your Portfolio

IPOs have become more frequent than ever in recent years, but many investors are falling victim to them.

What’s happening?

Last week we talked in detail about the record number of IPOs hitting the market this year.

In that article, I told you that there is a pattern forming nearly every time a big name first hits the market.

The amount of hype and excitement surrounding IPOs of popular companies leads to an initial buying spree that is often followed by a sharp dip as the excitement dies down – leaving investors that bought during the height of the frenzy holding the bag.

We’ve seen it play out time and time again over the last few years from some of the market’s most anticipated IPOs:
  • Lyft, Inc. (LYFT), one of the world’s top rideshare companies, debuted at $72 per share in March 2019 and gained as much as 8.7% on the first day of trading before falling more than 37% the rest of the year.
  • Popular social media platform Snap Inc. (SNAP) gained more than 22% in it’s first 24 hours on the market in March 2017 but then lost half of its value before Thanksgiving.
The list of similar IPO outcomes over the last few years is long, but investors continue to fall into this trap.

And with one of the most highly anticipated IPOs of the year seemingly behaving exactly as I expected it to, I want to make sure you don’t become a victim.

Where’s the money?

Ever since its free trading app first became available to download back in 2013, Robinhood has been attracting hordes of retail investors to its user-friendly platform.

And after Robinhood saw its ranks swell from roughly half a million in 2014 to more than 31 million users in 2021, the broker has gone public under the name Robinhood Markets, Inc. (HOOD).

As one of the major forces behind the retail investor revolution that the market has experienced over the last several years, the brokerage platform’s IPO has been highly anticipated for months now.

But once again, we’re seeing that same old IPO pattern play out.

Shares of HOOD opened yesterday at $38 per share and unsurprisingly spiked quickly up to $40.22. But that momentum wasn’t even able to last an entire day, as shares sunk as much as 17% from that high in the hours that followed.

But if you were considering jumping in now that HOOD has fallen from its initial spike, I’d warn you against it.

Here’s why…

How do I get some?

The way Robinhood is able to make money while offering commissions free trading to its users is through a system called pay-for-order flow. If you’re unfamiliar with it, it basically means that Robinhood is compensated by market makers who then executes the trade for the investor.

But that business model is facing a slew of potential headwinds lately.

The SEC and Financial Industry Regulatory Authority (FINRA) have been forced to investigate the practice after a mountain of alleged compliance issues associated with payment-for-order-flow have cropped up in recent months.

What’s ironic about this is that the issues with payment-for-order-flow have been magnified by the wave of new retail investors that Robinhood helped to usher into the market in recent years.

With the regulatory bodies currently investigating how Robinhood and market makers are handling order flow from investors, Robinhood could face even more fines in the future at least. In the worst-case scenario, Robinhood’s entire business model could come under threat.

I said it last week and I’ll say it again: stay far away from Robinhood until we can know for certain that the regulatory pressure around it has passed.

The IPO Strategy Wall Street Wants to Keep Quiet

While I don’t typically invest in companies after they’ve already IPOed for the reasons I’ve just detailed, there is a better way to play the huge profit potential around companies that decide to go public.

A well-known investment reporter recently stated that a new investment vehicle should “be on radar screens everywhere.”

A veteran economic analyst calls them “the best kept secret of the investment world.”

Pre-IPO rights have produced exceptional peak gains of 2,088%, 6,566%, even 9,075% in months.

Yet Wall Street and the financial media have sewn their mouths shut.

It’s time you knew the truth. Click here to see more.

In the Spotlight: A big prediction for the cannabis industry

After Canada passed legislation to completely legalize recreational cannabis in 2018, a boom occurred for publicly traded cannabis stocks.

But in recent years, as Canada’s weed industry has struggled with growing pains, related stocks have sagged heavily from their highs.

But one of the world’s leading cannabis producers, and my favorite name in the space, is predicting a huge catalyst for cannabis is just around the corner.

For years now, the writing has been on the wall that the United states is the next big thing in cannabis.

But despite public opinion now swaying in favor of allowing recreational use, lawmakers have been slow to change laws to reflect the changing sentiment.

Tilray, Inc. (TLRY) CEO Irwin Simon, however, thinks that we’re closer than many believe to legalization.

On Wednesday, Simon commented that he believes U.S. legalization is likely to happen “over the next 18-to-24 months…”

While Simon didn’t specify the reasons for his optimism, it is a clear indication that the world’s largest producers are gearing up for entry into the U.S. market.

And when it finally happens, the profit potential is going to be unlike anything we’ve seen before.

Stay tuned for more investment ideas as I continue to delve into the best opportunities out there for U.S. legalization.

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