Last week we explored how hindsight bias can trick you into thinking that you can spot the next Amazon (Nasdaq: AMZN) IPO before anyone else. (You probably can’t).
Sure, getting in on the “ground floor” of a huge success like Amazon will do wonders for building up your nest egg. But that’s no easy feat. Consider the fact that most IPOs end up trading for less than their IPO price at some point — many of them for far less. And some even turn out to be total bombs, quickly destroying the capital of all over-eager Day 1 investors.
I recently wrote about how to avoid “bomb” IPOs to the early-access members of my newest service, Cannabis Paydays. Since we’re targeting companies in the still-developing cannabis industry, it’s imperative we protect ourselves from the worst of the space’s newly-formed ventures.
And that’s why I’ve specifically designed Cannabis Paydays to identify the best cannabis stock opportunities based on price action, more so than any company’s “story” or promises.
Greenlane Holdings Inc. (GNLN) is a great example of why I decided to do that…
Cannabis IPO Down 66% in Two Months
Greenlane Holdings Inc. recently made its initial public offering (IPO) on the Nasdaq.
It debuted on April 18, just before cannabis enthusiasts’ annual “420” day — quite apropos, of course, as Greenlane is a leading supplier of headshop accessories, ranging from glass water bongs and “herb” grinders, to high-tech vaporizers for both nicotine and, well, whatever leafy green material you’d like.
Greenlane’s IPO was allowed because the company doesn’t actually sell cannabis.
Plant-touching cannabis companies are currently forbidden from listing on major U.S. exchanges, like the NYSE or Nasdaq, since U.S. Federal law still prohibits the sale of cannabis.
But Greenlane is a “No-Touch” company. It’s been legally selling legal smoking and vaporizer accessories since 2005.
I think Greenlane is a solid company that will prove to be a lucrative “picks-and-shovels” play on the cannabis industry. So it’s firmly on my radar.
Good Stock, Bad Time
But so far, I won’t recommend buying shares of Greenlane’s stock because it doesn’t yet meet the criteria of my trend-and-momentum strategy.
The stock’s price action has just been too weak! Shares of GNLN opened on April 18 at $29. Then they immediately fell to a low close of $13.34 on May 2 — a 54% drop in just 10 days!
If you read another one of my Rich Investor pieces, on “How to Avoid an IPO Landmine,” you know that a waiting period and trend rule can work wonders toward helping you sidestep the initial carnage that many IPO stocks suffer through… keeping you cool, calm, and collected while everyone else is caught up in the frenzy.
That’s certainly been the case with Greenlane’s stock. It’s proven to be a falling knife so far. And I won’t be recommending it until it’s already trending higher to a significant degree.
Now, I realize that feels counterintuitive. We’re taught to “buy low and sell high.” So buying something after it’s already moved significantly higher can feel foolish.
But would you believe it if I told you that you can wait for Greenlane’s stock to double in price and still buy it at a discount to its IPO?
Let me show you what I mean…
Buying After a Double
Here’s a chart of Greenlane (GNLN):
The blue line at $29 shows you what you would have paid for GNLN when it opened on April 18.
The red dotted line at $9.06 tracks the stock’s lowest close.
And the green dotted line at $18.12 shows where the stock will be trading after it increases 100% (“doubles”) from its lowest close.
Think about that…
By choosing not to purchase this IPO on Day 1, you first avoided a 69% drop.
And then, even if you decided to wait until Greenlane proved capable of doubling its share price — a sign of strength, and no small feat — you still could buy into the stock at a discount to its IPO price!
That’s pretty incredible, don’t you think?
A Common Occurrence
Of course, Greenlane may be unique in that it’s one of a small handful of cannabis companies listed on a major U.S. stock exchange for now.
But it’s not unique in giving patient investors a “discount-to-IPO” opportunity somewhere down the road after the stock has proven its strength via uptrending price action.
Consider Snap Inc. (NYSE: SNAP)…
Snap’s IPO launched on March 2, 2017, at $24 a share. But for all the hype the IPO drew, the stock got off to a rough start…
It was trading for less than $24 by Day 3, and it hasn’t traded above that debut price ever since!
Have a look:
Here again, the blue line indicates SNAP’s IPO price of $24. The red dotted line tracks the stock’s lowest close. And the green dotted line tracks the price at which the stock will have doubled its lowest close.
Watch how this played out for anyone who said, “You know what, I’ll wait until shares of SNAP double… and then I’ll buy in.”
The stock would have been avoided throughout 2017 and 2018 since it failed to double in price…
On December 21, 2018, the stock fell to an all-time low of $4.99. Now, you wouldn’t have known at the time that the stock’s decline had ended, but throughout January, as the stock began to climb higher, you would have known that your targeted entry price was $9.98 (i.e. $4.99 x 2).
And eventually, on February 25, shares of SNAP closed at $10.12 — marking a 100% increase, or “double,” from its all-time low close of $4.99.
All told, you could have bought SNAP then for $10… a 58% discount to its IPO price! And that’s after avoiding the stock’s two-year, 79% decline!
The Best Indicator I’ve Ever Found
I’ve been trading and developing systems for a long time. I’ve researched and tested hundreds of indicators, looking for the best way to separate stocks into “buy,” “sell,” and “avoid” buckets.
And while it’s deceptively simple — and thus overlooked by many — a stock’s trend is generally the best indicator of its strength.
When a stock is already trending higher, your odds of success are higher and your risk is lower. And when a stock is falling, your odds of success are lower and your risk is higher.
It’s as simple as that, and exactly why a trend rule is a must for me.
I’ve incorporated trend rules into all of my systems, including the ones I use in my Cycle 9 Alert and 10X Profits services — and, of course, here in 7-Figure Trader.
I’m also incorporating this timeless “trend-following” principle into my approach to identifying the cannabis industry’s hottest opportunities. And Greenlane’s IPO is the perfect example of why that’s so.
The cannabis industry is full of hype. And dozens of new cannabis companies will IPO in the coming months and years.
Greenlane is among the first of many to come — and as I said, I expect it to be a great “picks-and-shovels” play. But I won’t be recommending it until the stock first establishes a significant uptrend.
That’s when we’ll know it’s safe to buy in.