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7 IPOs to watch even after they go public
The IPO game is risky, and getting in at the start is tough. But some simple rules will let you know when to jump into newly public companies.
By Michael Brush
So you arent wealthy enough to be among the privileged who get a crack at sizzling initial public offering shares before they pop with the first trade. Dont worry. There are other ways to make money in todays hot IPO market.
It can be as simple as buying IPO shares just out of the gate. Many investors who pick up IPO shares early still see their stocks leap anywhere from 30% to 200% in no time.
Look at the discount retailer eCost.com (ECST, news, msgs). It traded at $6 for more than a week after it came public in late August. Recently, the stock reached $18. Cogent (COGT, news, msgs), a biometrics company, came out at $16 in late September. It has bolted 75% to $28. And Internet software company WebSideStory (WSSI, news, msgs) rewarded early buyers with 30% gains in four weeks, after it moved above $12 from around $9.
In the coming months, dozens more IPOs will debut, and several are likely to produce similar fireworks. But how do you know which ones? For help, we consulted two experts in the IPO market: Tom Taulli, who tracks the latest IPO news at his Web site, CurrentOfferings, and Linda Killian, portfolio manager at IPO Plus Aftermarket (IPOSX). The fund, run by Renaissance Capital, tracks IPO news at its Web site, ipohome.com.
A word of caution
Placing bets like this on fresh IPOs comes pretty close to outright gambling. After all, the IPO market is fraught with risk, volatile stocks and plenty of surprises.
So please remember, dont bet the farm. As a responsible investor, you should rarely put more than 2% to 5% of your overall portfolio in any one stock. That way, if youre wrong, the damage isnt too bad.
But the nice thing about IPOs is you can make money in the after-market, especially in the early stages, says Taulli.
Heres why:- Investment bankers appear to be deliberately pricing IPO shares too low again. After all, cheap IPO shares serve as good currency for rewarding the best clients.
- Theres scant research coverage in the early days of an IPO because of quiet periods for most analysts at this stage. So a hot company might go misunderstood. (Though most of what you need to know is in company filings in the Securities and Exchange Commission Edgar database. )
- Finally, IPOs also have small floats -- relatively few shares available to trade. So if good news does arrive in these early stages, it can have a big impact.
Here are three ways to identify IPOs that might do well in the weeks after they open, and seven companies that fit the bill. All have decent revenue growth, clean management and solid investment bankers behind the deals.
History repeats itself
Rule No. 1: Look for IPOs that are similar to recent hits. On Oct. 18, the day before Interchange (INCX, news, msgs) came public, Taulli published a piece predicting the company would do well because its similar to Google (GOOG, news, msgs), a stock that caught fire after its August debut. Interchange takes money from advertisers for placement in search-engine results. Taulli made a good call. In less than four weeks, Interchange shares had tripled.
So, whats next? Taulli says companies running exchanges or trading platforms for stock, bonds and options have a good track record after their IPOs. That might bode well for OptionsExpress, an online brokerage for options. It will trade with the ticker OXPS when it comes out in the coming weeks.
Look at its predecessors. Archipelago Holdings (AX, news, msgs), an electronic stock exchange, recently traded around $18, more than 50% above where you couldve bought when it came public in August. Electronic bond-trading company MarketAxess Holdings (MKTX, news, msgs) last week traded about 20% above where it traded on its first day out in early November. And Chicago Mercantile Exchange Holdings (CME, news, msgs) recently traded for more than $200, about 400% above where it traded just after its IPO at the end of 2002.
But by far the hottest areas for IPOs have been online retailing and paid search engines. Shares of companies such as Google, Shopping.com (SHOP, news, msgs), and Interchange are up from 30% to more than 100% since their first trade.
Taulli suggests watching a similar company, SmartBargains, which will trade under the ticker SBAR. The company offers excess merchandise like apparel and consumer electronics online at discount prices. It's similar to Overstock.com (OSTK, news, msgs), a great performer since its IPO.
Another possibility is HouseValues, an online service that helps residential real-estate agents cultivate leads through the sites HouseValues.com and JustListed.com. No ticker has been assigned yet.
Another way to play the iPod
Rule No. 2: Look for hot consumer markets. In April 2003, I suggested readers consider Apple (AAPL, news, msgs) at $23 as a cash-rich value play that might do well in part because of an impending foray into the entertainment business. Since then, Apples iPod has been a smash hit, and the stock has more than doubled to $55.
The next play on iPod growth could be an upcoming IPO called PortalPlayer, says Killian, the IPO Plus Aftermarket portfolio manager. The company, which will trade under the ticker PLAY, designs high-performance audio chips and software that help iPod users manage their play lists.
Its not profitable yet, but it is going to get a lot of attention, says Killian. Market research firm IDC estimates hard-disk-based audio-player sales will grow to 25.5 million in 2008 from 2.7 million worldwide in 2003. Theres a bit of risk, however, in that Apple accounts for 92% of PortalPlayers revenue.
Next, with stars like Ben Affleck putting the spotlight on high-profile, high-stakes poker tournaments in the increasingly popular World Poker Tour, it makes sense that a gaming IPO might capture investors' imagination. Throw in exposure to the high-growth areas of China and Las Vegas, and you have a potential winner in Las Vegas Sands, which will trade under the ticker LVS.
The company operates the popular Venetian Casino Resort in Las Vegas, as well as the Sands Convention Center. Last May, it opened the Sands Macau Casino in China as one of the three government-approved casino operators in this former Portuguese colony returned to China in 1999.
Macau is the only place in China -- and one of only a few places Asia -- that permits casinos. Its one of the world's largest and fastest-growing gaming markets. About a billion people live within a three-hour flight of Macau, which is about an hour from Hong Kong by hydrofoil.
Sands also is opening two other resorts, in Las Vegas and Macau. In the year's first six months, Sands took in 75% of the revenue it booked in all of last year and produced 84% of the cash flow.
Executives may provide clues
Rule No. 3: Follow the insiders. You might think insiders would get enough options ahead of the deal, so any buying by them in the first days out might be a sign they're trying to shore up a weak stock price. Instead, they probably just like the stock, says Killian. To avoid looking like pigs, insiders dont necessarily gorge on options ahead of an IPO.
Two recent examples: Tower Group (TWGP, news, msgs), an insurance company where Chief Executive Michael Lee purchased $2 million worth of stock at $8.50 on Oct. 26. And U.S. Shipping Partners (USS, news, msgs), where insiders bought over $1 million for around $23 on Nov. 3 and 4.
But even a company thats been thoroughly vetted in the IPO process can come up with some nasty surprises as soon as it hits the stock market. Jamdat Mobile (JMDT, news, msgs), a popular IPO that sells games, software and ring tones that download to your cell phone, traded up 45% to $32 within a month of coming public in September. Then the company shocked investors with a disappointing quarterly report on Nov. 9, and the stock went right back down to where it started.
Stocks hit by these early disasters can bounce right back. The reason: It could be that traders punish thinly traded IPO shares too harshly for surprises so early in the game. The IPO Salesforce.com (CRM, news, msgs), for example, got hammered in mid-July when it guided expectations down only weeks after coming public. But three months after the disaster, the stock was 30% above where it traded during its first days.
Bad news gets the stock out of the weak hands. You get a lot of flippers in these stocks, says Taulli, And bad news brushes them away to some extent.
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