Thursday, November 9, 2017

My Experience with SOGO, or When to Sell an IPO

A couple days ago, I got an email invitation from my broker (Interactive Brokers) to subscribe to the SOGO IPO. The expected price range is $11-$13 and the minimum reservation is 100 shares. I skimmed over the prospectus and thought it's outrageously overpriced at 100 times earnings, and growth had already shown signs of slowing down, but there should be a pop for several reasons:

1. The stock market is hitting all-time highs. The general market is very bullish.
2. Internet stocks are especially hot. To wit: AMZN, FB, TCEHY, BIDU, GOOGL.
3. The amount of stock offered was relatively small (about 10%) compared to total outstanding after the IPO. This can create an artificial scarcity that drives up demand.

So I went ahead and reserved 2000 shares. That would be $26,000 if SOGO price at the top of its price range. I could have reserved a lot more but did not want to jeopardize my margin in case something bad were to happen. I felt that was enough if there is a 20% pop I can make a decent $5,200.

I got an email this morning shortly before the market opened that SOGO priced at $13 (top of the range) and I got allocated 100 shares (the minimum). Needless to say, I was somewhat disappointed because this puny amount won't give me much profit after all. Well, at least it suggests the demand is very strong increasing the odds of a nice pop.

But to add insult to injury, the pop was small as well. As you can see from the chart above, the stock opened at $13, the same as the IPO price. Ouch! It did proceed to go up immediately to as high as $14.70 (13% gain), but then started giving up much of the gain and traded around $13.50 most of the rest of day. The maximum profit window was only for the first 10-15 minutes after the stock started trading at 10:30am. The max price came around 10:42am. The trading volume was heaviest as soon as trading began, then tapered off rapidly and leveled off after the first 30 minutes.

I had put in a limit sell order at $15 hoping for a $200 gain, but after midday I realized that simply may never hit. So I modified it to $13.75 (5.8%) which executed, giving me $75 profit from this trade.

The lesson? Even when all the conditions seemed ripe, there might not be much of a pop after all. One has to be nimble and take profit after 10 minutes of the start of IPO trading and not be too greedy. I could have put in a limit order at $14.50 instead and make twice as much profit as I did. 

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