3 Letters that Can Kill Your Portfolio...

Feel like losing some money?

Cool, because I’ve got some killer IPOs for you…

The major averages are just a hair away from all-time highs. But some of these shiny, new stocks on the market are headed for early graves.

Take busted arts and crafts offering Etsy. This company is considered by many to be the Amazon of cottage-industry arts and crafts.

But here’s a hint: Whenever someone refers to a company as the Amazon of anything, it’s probably time to run in the opposite direction. That’s probably because Amazon is the Amazon of everything. In fact, Amazon Handmade was just launched last month as a shot across Etsy’s bow.

And its chart? Let’s just say that Etsy has seen better days during its short life as a public company:

Homemade Losses

After spiking above $30 on its first day as a publically traded company just seven months ago, Etsy stock has fallen into the blackness. Third quarter revenues missed expectations Monday night—and the stock dropped another 7% Tuesday morning, adding insult to injury. It doesn’t help that the stock has caught downgrade after downgrade. Etsy even had to deal with scrutiny over seller practices, including the potential sale of counterfeit goods earlier this year…

Now that the smoke has cleared, the stock is down a cool 49% from its IPO price.

I know it looks like I’m picking on Etsy—but we’ve seen this type of action time and time again from over-hyped IPOs. Everyone gets sucked in by the media hype surrounding the next big offering. Then the stock fizzles once reality sets in. And the suckers who bought are left holding the bag. The stock might come back after it bottoms out. Maybe. But it can be a long, grueling slog back to breakeven if you get stuck in one of these death spirals after buying near the top.

It really grinds my gears that so many investors fall for the IPO hype…

“Chasing initial public offerings becomes a spectator sport in a strong bull market and every financial journalist in the biz covers the first few days of a new stock’s public life,” I said earlier this year. “Then they forget about them until that first big earnings miss. By that point most folks are already in the hole.”

IPOs are often just ways for weak businesses to make a fast buck. Social media stocks are attracting investors’ attention? Perfect. Every business that can claim social network status will line up for an initial public offering. That’s just how it always works out. Eventually, an IPO could turn into a great investment. But it’s best to wait for the initial hype to die off before throwing any money at these wild stocks.

So steer clear of these three letters: I-P-O — unless you like losing money.

Sincerely,

Greg Guenthner
for The Daily Reckoning

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The Daily Reckoning