There is this strange ongoing debate that happens to reappear on the Street every now and then about how the market is “priced to perfection.” I find this thought puzzling, amusing, and thoroughly untrue. In fact, I find it so absurd that when I see some big-time Economist getting on CNBC and yelling about how the market does price everything with precision it literally makes me burst out in laughter. The market does not price things to perfection, I am 100% sure of it. I know this because my ability to profit as a day trader, which I do frequently enough, is reliant on the fact that the market prices stocks improperly every single day.
The most recent case and point: LinkedIn. LinkedIn is a company that generates 15 million dollars a year. The IPO was priced at 25 then 35 and finally 45 dollars/share. By the time the stock hit the market it was priced a whopping 80 dollars/share. And then we got to watch and comment with some levity on Shine’s Room as the stock race to an inexplicable 122.69 before falling back to par. At 45 dollars LinkedIn has a market cap of some 4.5 billion, at 80 we are looking at 9 billion and at 120 well… its just absolutely absurd.
I was not trading during the last tech boom, although I’ve been informed that stocks seemed to make these absurd moves frequently back then. In case you don’t know what’s really going on here is that this IPO was structured with only a short amount of the companies float, basically engineering this kind of pressure skyward. LinkedIn is not worth nearly the value that its stock is trading at currently but without the ability to short the stock for the first 60 trading days, there is little downward pressure.
I missed the move on LNKD, which is all I really care about as a trader. And when you miss a play in a name, your best move is to not take a position in the stock at all. You have to say to yourself, next time. But getting in after the hype will often land you in unfriendly waters.
This isn’t the last of this type of action from these kind of IPOs. This is just the beginning. And with Pandora, Nielson, Zynga, Zipcar, Groupon, and potentially the granddaddy of them all, Facebook, on the horizon, look for this continued “pricing” as a way to profit.