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Holiday IPOs to warm your hearth
Several are on the way. But before filling your stocking, make sure the businesses are solid and let the initial heat cool off. Here are some names to consider.
By Jon D. Markman
Theres nothing hotter on Wall Street than the debut of a very cool company. Google got everyone going last year. Baidu.com (BIDU, news, msgs) was the bomb so far this year.
Are you ready for some brand-new issues for the holidays? Underwriters are standing by, just waiting for the right moment to unleash a few. This week, theyre unveiling the spiffy athletic gear maker Under Armour, with a deal thats supposed to price at $8 to $10, but will probably make its first trade in the high teens. And by year-end, fans of the Chipotle Mexican Grill will get a chance to roll some barbacoa burritos into their portfolios.
If you are a major client of a brokerage, you might be able to get a few hundred shares. Otherwise, you will just have to wait until theyre in the so-called aftermarket and buy them at elevated prices with the rest of us schlubs.
How can you tell if these initial public offerings are worth buying? Well, that's the hard part. And theres no easy answer, because you have to first rub the stars out of your eyes and focus on real earnings metrics. Of which there are, basically, none. So the best way to pick up hot IPOs, Im afraid, is to wait until theyve cooled off.
Less supply, more demand
Ive got some ideas along those lines. But first, let me note that the good thing about IPOs this year is that there have not been a lot of them. Indeed, if you accept the notion that broad market returns are as much about the overall supply of stocks as they are about demand for stocks, then you have the right to be optimistic today.
Nearly 10% fewer new issues have come on the market so far in 2005 than at the same point in 2004. And the difference in new issuance between today and the 1999-2000 period is huge, with the pace running about 65% behind those superheated fantasy years.
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This means two things to investors:
- First, with less new supply coming on the market, the demand for stocks already in the market should firm up.
- And second, because its harder to come public these days, the quality of new issues has improved, giving shareholders a little more comfort that freshly minted public ventures are more sound.
According to Kathleen Smith, a principal at IPO research and fund management firm Renaissance Capital, nearly 70% of all new public companies are profitable this year vs. 64% last year. They are also more seasoned. The average age of a newly public company is 22 years in 2005, vs. 16 last year and 10 in 1999 and 2000.
Smith says that almost a fifth of the stocks that have gone public this year have been financials; trailed by health care, at 17% of IPOs, technology, at 12%; and transportation, at 11.5%. Those financials have averaged a 7% gain, and theyve been led by tremendous demand, ironically, for securities exchanges and brokerages. The most notorious of the bunch is now-bankrupt commodity specialist Refco (RFXCQ, news, msgs), which is down 95%. Doing much better is GFI Group (GFIG, news, msgs), which specializes in the trading of derivatives, such as credit-default swaps; its up 110% since January and still looks great. Two more are CBOT Holdings (BOT, news, msgs), a futures and derivatives exchange, up 102% since mid-October; and electronic options-trading specialist International Securities Exchange (ISE, news, msgs), up 69% since March.
Part of the allure of an IPO is the idea of a fresh start. When a company has never messed up a quarter, when its stock has never blown up, when its marketing materials read like a gospel foretold, it seems like the skys the limit for prices.
Maidenform's bad form
Google (GOOG, news, msgs), with its turbocharged start, is what everyone dreams of. Not Maidenform Brands (MFB, news, msgs), a ladies undergarment maker that went public at $17 in July and has seen its stock march almost straight downhill since. Its now trading around $11. Something tells me they missed a marketing opportunity by not using the ticker symbol BRA, so thats one strike against Maidenform. Another is the fact that the company broke the first rule of IPOs by missing its first major earnings number. On Nov. 10, the company reported that its third-quarter profit sagged 13% due to rising expenses.
How could that happen? Inexperience shows when all eyes are on you. Analysts at research firm IPOfinancial.com point out that, for the first year, at least, IPOs are hybrid outfits in a transition from private to public hands. The sudden intake of cash created by an IPO can boost results of operations outlined in the companys registration materials. The hope for just such a boost often hypes the stocks performance the first few days or months that it comes public.
Some companies weather the IPO effect well, while others struggle with the difference between investors gauzy optimism and a reality that is very often mundane. Here's a closer look at three 2005 IPOs that look like they have potential.
Hercules Offshore (HERO, news, msgs) is one of many energy stocks that have gone public this year. Did you catch the jazzy symbol? Good sign. Here are two more: The company came public at $20 in late October and now goes for $22.80. The upbeat information imparted: Stocks that price at $20 or more tend to be higher quality, and ones that immediately head higher and stay up for a week or more tend to remain buoyant. According to a study by my research team, IPOs that priced this year under $10 have gone on to lose 7% in the aftermarket. IPOs priced between $10 and $20 have risen an average of 13%. IPOs priced over $20 have averaged 32% gains. The average gain for all IPOs in 2005 is 12.5%.
Hercules provides shallow-water drilling and services to the oil and natural gas exploration and production industry in the United States Gulf of Mexico. Its like a miniature version of successful large-cap Transocean (RIG, news, msgs).
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