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Steer clear of 'high-risk' IPO space as roughly half of 2021's debuts trade below offering price, trader says

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IPOs are having a hot-and-cold year — where two traders see opportunity

Steer clear of newly public stocks, one trader warns.

Market conditions are turning less favorable for initial public offerings after a record 2020, Chantico Global founder and CEO Gina Sanchez told CNBC's "Trading Nation" on Wednesday.

Roughly half of 2021's IPOs are now trading below their offering prices, including recognizable names such as Poshmark, Didi Global, Compass and Krispy Kreme.

"Coming into 2021, we're peaking out in terms of performance and companies are going to have a lot of trouble with, quite frankly, harder earnings comps going forward," said Sanchez, also chief market strategist at Lido Advisors.

"That doesn't mean they're doing poorly, it just means that expectations are very high and so it's easy to underperform them and that's the challenge for IPOs," she said.

Broader market conditions also haven't made it easy for recent debuts, Sanchez said.

"The entire S&P is acting very cautiously. It's rewarding very low-volatility sectors and it is punishing high-volatility sectors, and IPO companies tend to be the highest volatility stuff out there," she said. "So, this is a high-risk area that I think it really makes sense to stay away from right now."

More eager investors should still take a long-term approach to this space, Blue Line Capital founder and President Bill Baruch said in the same interview.

"You have to be very cautious in this area, especially just given the overall market environment at these elevated levels," Baruch said.

His top pick in the group was Roblox, the gaming platform that went public via a direct listing in March.

Baruch liked the stock for its work on the metaverse, a virtual, 3D world in which users can play, work and collaborate, and its limited exposure to China, where regulators are cracking down on gaming companies. Only about 17% of its daily users come from the Asia-Pacific region, he said.

"Look to gain some exposure at the right place," Baruch said. "There's a good trend line in this stock coming around at 77 bucks, maybe as high as $80 over the next couple of days."

Roblox traded down nearly 1% on Thursday afternoon to around $81.34.

"I find it, again, attractive for the long term but a space to be very cautious in," Baruch said.

Disclosure: Blue Line Capital owns shares of Roblox.

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