Caution: Don’t Buy This Stock Yet

Shares of Snap Inc (NYSE:SNAP) are arguably one of the sadder stories for investors year to date.

What was made out to be a promising initial public offering (IPO) and certainly one of the most marketed ones thus far in 2017 has led to a one-way street lower for the stock. Yet, there may be hope on the horizon.

You see, when a company first enters the public equity markets, particularly a big sexy name like Snapchat, emotions run high among interested parties, from giddy investors jumping to subscribe to the IPO to the underwriting investment banks trying to get the best deal possible for their client (Snapchat).

Once the IPO is priced and the stock officially begins trading on the stock exchange, investors and traders alike enter a honeymoon phase with the stock.

Fundamental investors need a few quarters to gauge the company’s fundamental story better while traders need to figure out the rhythm or personality that the stock develops over time.

As such, to yours truly, a freshly minted IPO stock such as SNAP stock is not something I like to dabble in during the first three to five months.

For investors in Snapchat, however, the end of July and August respectively will see the so-called lockup period expire, and investors who were allocated stock from the IPO (among others) will be free to sell out of their positions for the first time. The bears will say that this could open the floodgates as investors try to stampede out of the weak-performing stock while the bulls argue that this possible selling spree at the end of a lockup period may be when more serious investors with deeper pockets swoop in and begin building long positions.

While I am not here to compare Snapchat as a company to any other company, it is worth pointing out that shares of Facebook Inc (NASDAQ:FB) after their initial public offering took about fourteen months to get on their feet and excite investors in a more meaningful fashion. In other words, if (big if) Snapchat should turn out to be a real success story for investors, it could take plenty more time until a real meaningful bid arises.

SNAP Stock Chart

The official IPO price for SNAP stock was $17 and a break and hold below there is not something that many investors are currently building into their models. Yet, if I look at IPOs from over the past few years, I see plenty of stocks that did that and, only once they spent time below the IPO price, did eventually become interesting for more serious buyers, all else being equal.

As such, I am patiently awaiting the end of the lockup periods for SNAP stock and would be willing to leg into a long position either upon a very strong weekly bullish reversal above the $17 area or upon an equally strong bullish weekly reversal should it occur below the $17 area. Through the lens of investor psychology, in essence what I am looking and waiting for is weak-hand investors to drop out of the stock and larger money investors to enter the SNAP stock story.

— Serge Berger

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Source: Investor Place