As days are passing by, the hype around initial public offerings (IPOs) is becoming more and more frenzied. Investors are constantly trying their luck by applying for every worthy upcoming IPO with the hope of getting an allotment.
But even after trying so many times, I’m sure you might not have received an allotment in multiple ongoing IPO. Yes, getting an allotment is purely a matter of luck.
But what if there was a strategy which can help you make money in all the upcoming IPOs without getting an allotment?
Sounds great right?
Our Chief Markets Editor, Apurva Sheth has built an IPO breakout strategy. This IPO breakout strategy will help you create wealth even if you don’t get an allotment in an upcoming IPO.
In this article:
- Why investors do not get an allotment in an ongoing IPO?
- IPO breakout strategy
- Rationale and rules of an IPO breakout strategy
- Examples of IPO breakout strategy
So, let’s begin.
First, let’s look at a few reasons why investors do not get an allotment in an ongoing IPO.
- IPOs are widely covered
When it comes to mainstream IPOs, promoters and merchant bankers promote the IPO by going on a roadshow. The IPO is advertised in newspapers and hoardings. This hype generates high demand for the IPO in the market resulting in oversubscription.
- Small issue size
Most companies coming up with an IPO are small or mid-cap companies. They have limited issue size. So, as the size of IPO is small there is a limited supply of shares and it is not possible for everyone to get an allotment.
- The allotment ratio is poor
Investors do not get an allotment in IPO because of high demand and limited supply. Most are left high and dry without any allotment.
- Excess supply after listing
Now, most investors apply for an IPO only for listing gains. Upon listing they sell the shares which leads to excessive supply in the market which pushes the stock price further down.
You must have a different strategy if you want to make money from IPO’s. Thankfully, we have a strategy that can help you make money even without allotment. Our viewers have showered their loved in thousands on YouTube Channel for this strategy.
Watch this video to understand the IPO breakout strategy better.
The Rationale of IPO Breakout Strategy
- Look for entry opportunities after the initial frenzy has dried
As we know by now when there is an ongoing IPO or an upcoming IPO promoters advertise it to a great extent which creates high demand. Upon listing, we see massive supply because investors sell their shares to book listing gains. Now after this excess demand and supply, the trend needs some time to stabilise. So, the first criteria of our IPO breakout strategy is that we will wait for an entry opportunity after the initial frenzy has died down. This will take a few months after IPO listing.
- Look for good momentum stocks breaking out to new highs
Next criteria for the IPO breakout strategy is that the IPO stock must have good momentum and must hit new highs after the initial frenzy has died down. So, it is obvious that a stock would hit new highs only when there is real demand in the market.
- Stock must trade above the listing price
Stocks that are hitting new highs and trading above listing price will have limited selling pressure. If selling pressure is limited then chances of upside will increase. We are only interested in such stocks where these conditions meet.
Now let’s create some rules based on the above rationale.
Rules of IPO Breakout Strategy
Let’s look at a four rules of our IPO breakout strategy.
Rule 1: Current market price (CMP) of the stock must be above the listing day’s closing price.
Rule 2: Today’s close must be higher than the last 120 days high. This would indicate that the initial frenzy has died and the stock is hitting new highs because of real demand.
Rule 3: Trailing stop loss must be kept below the last 20 days’ low.
Rule 4: The most important part is that we must take entry only if the first three conditions are met within one year of listing.
Let’s take a look at how our IPO breakout strategy would work with an illustration.
Suppose an ongoing IPO with an issue price of Rs 100 lists at a 50% premium at Rs 150. In the next 120 days, the stock hits a high of Rs 180 and moves sideways for a while. Eventually it closes above the 120 days high of Rs 180 which forms our IPO breakout entry price.
Now, let’s take a real life example of Happiest Minds IPO and understand how the strategy would work.
Here is the chart of Happiest minds technology since listing. As you can see that the stock has grown substantially in a year. So, as per our strategy we must find the breakout price which is the day at which the stock had closed higher than the last 120 days high.
To find it we will apply the IPO breakout indicator on the chart which will highlight the 120 days high and let you know the entry price. It will also highlight when should you exit the stock by tracking the trailing stop loss of last 20 days.
So, this is what our chart would look like.
To know how to add the IPO breakout indicator, watch this video:
So, now when the chart gives an entry signal, you have to enter into the stock and exit when the stock hits the trailing stop loss.
Now that you know how our strategy would work. Let’s look at a few real-life examples of how the strategy has performed in the past.
1. Happiest Minds Technologies
Below is a chart of Happiest minds from tradingview.com. As you can see there is a green and red band above and below the candlestick chart respectively.
- The green band is the trailing 120day high which will help you analyse the breakout.
- The red band is the trailing 20 days low which will act as a stop-loss and will tell you when to exit the trade.
The issue price of the IPO was Rs. 166 and it got listed at Rs. 371. From September 2020 to February 2020 the stock was consolidating with a sideways movement. Later in mid of February, we see a substantial uptrend.
On 5th April 2021, the stock had given an entry signal by hitting the green band of 120 days high at a price of Rs. 551. Since then we see a strong momentum in the stock which sustains for almost 6 months and gives an exit signal at a price of Rs 1,428 on 30th September 2021. So, if you had entered into this position, you would have made a return of a whopping 159.17% in just 6 months.
2. Angel Broking
The IPO had an issue price of Rs. 305 and got listed at a discount at Rs. 275 on 5th October 2020.
If we take a look at the chart above, between October 2020 and April 2021, the stock had a sideways movement for almost seven months. On 6th May 2021, our IPO breakout indicator had given an entry signal at a price of Rs. 358 and the stock had an upward movement for almost three months and hit the 20-days trailing stop loss on 13th August 2021 at a price of Rs. 1,236. By executing this trade, you could have earned a return of 245.25% in just four months.
3. Polycab India
Polycab India IPO had an issue price of Rs. 538 which got listed at a 22% premium for Rs. 633 on 16th April 2019.
The stock had given an entry signal seven months post listing at a price of Rs. 718 on 17th October 2019. Later, on 16th March 2020, it had given an exit signal at Rs. 986 after hitting the trailing stop loss. If you had executed this trade you would have earned a return of 37.33% in just five months.
4. Prince Pipes Fittings
This IPO had an issue price of Rs. 177 which got listed at a discount of 10% on 30th December 2019 at Rs 160.
Even if the stock had listed at a discount we saw an initial frenzy for a few months which pushed the stock price up after listing. It took almost eight months for the stock to stabilise.
On 27th August 2020, the stock hit 120-days high after giving an entry signal at Rs. 186. Later, on 22nd December it gave an exit signal by hitting the stop loss at Rs. 245 which could help you generate 31.72% returns in five months.
All the IPOs we just saw would have created massive wealth for you. But there might be some cases where the stock might rise and fall in a short duration which might lead to losses. So, let’s look at a few losing examples as well.
5. Affle India
Upon listing Affle India had an open price of Rs 183.45 on 8th August 2019. Within the first four months, (by 22nd November) the stock gave a return of 90.16% as it was trading at Rs. 348. But the stock hit 120-days high and gave an entry signal on 13th February 2020 at a price of Rs. 389.10.
After hitting a high of Rs. 460.90 the stock plummeted and hit the stop loss of Rs. 328 in less than a month.
So, if you had entered into this trade you would have made a loss of 28.80%.
6. Neogen Chemicals
Neogen chemicals had listed at a price of Rs. 212 which got listed at a premium of 17% at Rs. 251. According to the IPO breakout strategy, we had received an entry signal at Rs. 501.35 on 11th February 2020. The stock moved sideways for a while and hit the 20 days low at Rs. 339.15. If you had executed this trade you would have made a loss of 32.31%.
Let’s take a look at IPO back testing results.
|IPO name||Issue price||Listing price||Breakout date||Breakout price||Trailing stop loss hit||Returns|
|Happiest Minds technologies||Rs. 166||Rs. 371||5th April 2021||Rs. 551||Rs. 1,428||159.17%|
|Angel Broking||Rs. 305||Rs. 275||6th May 2021||Rs. 358||Rs. 1,236||245.25%|
|Polycab India||Rs. 538||Rs. 633||17th October 2019||Rs. 718||Rs. 986||37.33%|
|Prince Pipes Fittings||Rs. 177||Rs. 160||27th August 2020||Rs. 186||Rs. 245||31.72%|
|UTI Asset management company Ltd.||Rs. 554||Rs. 476||4th May 2021||Rs. 676||Rs. 1005||48.67%|
|Computer age management services Ltd.||Rs. 1230||Rs. 1401||19th April 2021||Rs. 2011.9||Rs. 3269||62.48%|
|Indiamart Intermesh Ltd.||Rs. 973||Rs. 1302.55||22nd Jan 2020||Rs. 2379||Rs. 2285||-3.95%|
|Mazagon dock shipbuilders Ltd.||Rs. 145||Rs. 173||8th June 2021||Rs. 275||Rs. 241||-12.36%|
|Neogen chemicals||Rs. 215||Rs. 263.55||11th February 2020||Rs. 501.35||Rs. 339.15||-32.35%|
To conclude, the IPO breakout strategy is indeed a powerful strategy through which you can make money in almost all upcoming IPOs.
To make money by implementing this strategy all you need to do is open a Demat account with Samco and create wealth even without an allotment.
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