Wall Street Is About To Make A Fortune From Rigging the Market and So Can You
Companies / Renewable Energy Sep 29, 2009 - 03:38 AM GMTBy: Q1_Publishing
Stock stories just don’t get better than this.
What if I told you I’ve found a relatively small company shaping up to be one of the future leaders in the lithium/hybrid car battery industry?
You’d be somewhat interested, right?
Well, what if I also to you this is not your average battery company. Its battery technology was developed at MIT. It was originally financed by Sequoia Capital - the same early investors behind YouTube, Cisco, eBay, Yahoo, etc. It has a close relationship with General Electric.
The U.S. government has already cut a $249 million check to help it ramp up production. And finally that Morgan Stanley and Goldman Sachs were going to be big supporters.
You’d certainly be a little more than interested, right?
Well it’s a real company. I’d say it’s the best “story stock” to hit the market in a long time. More importantly, it proves how you can align your interests with Wall Street’s to ensure the big money players have a personally vested interest in making you money.
As Easy as A-1-2-3
The company is A123 Systems (NASDAQ:AONE). Its first day of trading was yesterday. The IPO was for 28.1 million shares priced at $13.50 a piece. The first shares traded hands at $17 - good for an instant 26%. Then it climbed to more than $20 per share through the rest of the day.
A few months ago I told readers of Prudent Investing it was going to be a hot one. And with a 50% gain on day one, A123 did better than even the most optimistic of us who have been covering this story for a while would expect.
There are two very important points to take-away from the strength of this IPO.
First, this IPO just shows how truly strong the demand is and will be for shares in the hybrid car battery markets. After the IPO there were more than 98 million shares outstanding. As of today, the company with no proven product, no major sales contract (GM actually passed on A123’s batteries for the Chevy Volt), very little production capacity, and no near-term prospects for profitability, sports a market cap of more than $1.9 billion.
Second, Wall Street desperately wants – maybe even needs – a scorching hot IPO.
The Best Paydays for Wall Street
Wall Street makes quick, relatively easy money from IPOs. The usual fee is anywhere from 5% to 7% of the total value of the IPO. In fact, the largest Wall Street firms collected more than $8.9 billion in underwriting fees for bond issues, IPOs, and secondary share offerings in the past three months.
Also, their top clients like mutual funds and hedge funds make sizeable gains from IPOs too. A trader at a mutual fund can place trades anywhere. But in exchange for sizable IPO allocations, they’ll be more likely to trade for the firm handing them the quick, low-risk win (it falls under the “soft dollar” umbrella like buy-side research).
A successful IPO is a win/win. And whether the markets are up or down, everyone is always looking for easy wins.
As a result, they all have a vested interest to ensure a few very successful IPOs to get this lucrative win/win market rolling again.
That’s why I expect shares of A123 to not just hold up, but to trend steadily higher. The IPO has taken a great first step, but if the shares can hold onto their gains for another month or two, the IPO would have to be considered a success. This success will lead to many more IPOs - especially ones from the green sector. There are hundreds of companies in need of capital and, as I expect the performance of A123’s shares over the next few weeks to prove, there’s plenty of investment demand for the green sector.
Rigging the Market for Yourself
In the end, yesterday’s big move in A123 shares is a bit bigger news than most of the headlines are giving credit.
A successful IPO is going to go a long way to getting this lucrative market going again. A123 must be successful to unlock a dozen more green energy deals, a dozen solid “overnight” gains for highly-valued clients, and millions in commissions for the investment bankers. The IPO market has been slowly coming back, but it’s still not anywhere close to what it once was.
(Side note: I’m a big believer in A123’s speculative potential. There are no earnings and no real way to value it. At this price, however, it may be an “OK” trade and it’s certainly not a truly “great” low-risk, high reward trade we look for here in the Prosperity Dispatch. Basically, you’re risking 50% to make 50% here. Risking $1 to make $1 is not going to cut it for successful investors).
Again, this IPO proves the interest in batteries and, as you’ll see over the next few years, there is a lot of demand for anything green. This is something we’ll go over in the days and weeks ahead (I recently sat down with one of the world’s foremost battery scientists in the world for the full scoop – full transcript from a batter insider is on its way).
The most powerful interests in the world are aligned around green energy. Labor, government, and Wall Street are all on board. And there’s still plenty of time to get in before the big gains will be had.
There’s one more. We all know by now Wall Street is pretty much rigged. Most shares are overpriced and it’s all a matter of timing, value, and being in the right spot before other investors start to pile in. So you can sit back and complain about it being a “rigged” game or you can learn how to play it and go along for the profitable ride.
The A123 Systems IPO proves there are ways you can align your own interest with Wall Street’s interests as long as you know how they work.
As an investor you’re going to have to make a choice. You can try and beat the system or you can put it to use for you. It should be obvious which most successful investors do.
Good investing,
Andrew Mickey
Chief Investment Strategist, Q1 Publishing
Disclosure: Author currently holds a long position in Silvercorp Metals (SVM), physical silver, and no position in any of the other companies mentioned.
Q1 Publishing is committed to providing investors with well-researched, level-headed, no-nonsense, analysis and investment advice that will allow you to secure enduring wealth and independence.
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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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