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Published: November 3, 2010
A surging stock
market has brought a smile to the face of investment bankers.
They've suddenly found a much more receptive environment for new
initial public offerings (IPOs), with 16 deals of at least $100
million being pulled off in October -- the best month for IPOs
this year. And the pipeline of fresh offerings is starting to
fill, which means that the whole fourth quarter could prove to
be a very active period for IPOs.
Notably, nearly half of October's IPOs were based in China,
though that proportion should diminish in coming months. Yet a
word of caution about China-based IPOs: These companies tend to
disappoint investors after a quarter or two, either by missing
expectations that were too high, or meeting those expectations
and then quickly doing a
secondary offering to raise yet more money.
In a moment, we'll look at October's crop to find the best
ideas, but we should first recall the "quiet
period" play, and how you can profit from it. After a
company is taken public, its underwriters are forbidden from
writing about it for a period 25 business days. But when their
mouths are unzipped, they often gush, giving the stock a fresh
bounce. So many investors like to find attractive-looking new
companies and buy shares soon before the quiet period ends.
Generally speaking, analysts will only speak cautiously of a
fresh stock if it has already had a strong run since the IPO. So
looking at the table below, China Cache (Nasdaq: CCIH),
TAL Education (NYSE: XRS), and Vera Bradley (NYSE: VRA)
are unlikely to see much of a push from analysts. (The analyst
bounce can only come from IPOs that were brought public by
large, reputable underwriters, which applies to all the names on
this list).
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China Ming Yang Wind Power
(Nasdaq: MY) is the classic slow-to-build
IPO. The company's efforts to sell the deal were apparently
underwhelming (as can be the case with many China-based IPOs,
where management's English-language proficiency is not up to
snuff yet). Yet this is precisely the kind of business for which
analysts gush as soon as they can. First, the company is seen as
a technology innovator. Second, it has a large and growing
backlog. And third, the Chinese government's support of
clean energy firms -- especially those that have a solid shot of
cracking export markets -- means that demand should stay robust.
But be ready to move quickly if
the stock gets a solid bounce from analysts. That's because many
rivals are lining up to go public as well, and this industry may
soon suffer from too many newly-capitalized firms that all rush
to add capacity at the same time with their IPO proceeds. And
higher industry capacity often spells price wars -- not a good
thing for Ming Yang, which has yet to even show a full-year
profit and may never generate anything more than tiny profit
margins once competition really builds. So this may be more of a
good trade rather than a good investment. The quiet period for
this stock ends this coming Friday, so you've got a relatively
small window to try and play the "quiet period" bounce.
In a similar vein, Global Education & Technology (Nasdaq:
GEDU) may get an analyst-led pop in mid-November. But this
education firm, along with its other China/education peers,
looks awfully expensive based on traditional metrics and would
need to be a good bit cheaper to be found fundamentally
attractive for long-term investors.
The Thanksgiving IPO bouncers
Later this month, we'll see analyst coverage possibly boost more
recent IPOs. For example, NetSpend (Nasdaq: NTSP), which
StreetAuthority contributor Tom Taulli wrote about, has quickly
become a force in the prepaid debit card market. As long as
analysts are willing to overlook the taint associated with
troubled financial firm Meta Financial (Nasdaq: CASH),
you can expect to see quite bullish reports.
Soon after Thanksgiving, analysts will weigh-in on Pacific
Biosciences (Nasdaq: PACB) and Examworks (Nasdaq: EXAM).
The former is a speculative but intriguing play on the ability
to rapidly sequence DNA -- the company has a strong technology
base, but also strong rivals. The latter is a solid, experienced
firm in anti-fraud efforts. Both of these stocks should receive
glowing analyst coverage.
The month's last IPO, SeaCube Container (NYSE: BOX), is
arguably the best value play of the whole group. The company's
fully-rented fleet of specialized shipping containers means that
cash flow is robust and more than ample to cover the
company's still-high
debt load.
SeaCube's bankers thought they could get $16 a share in the IPO,
but had to cut that price to $10. Investors are shunning most
shipping-related stocks, but this one may have been unfairly
tarnished, as it has a more solid
business model than firms like DryShips (Nasdaq: DRYS).
At this lower price, analysts are likely to note that shares
sport a single-digit
price-to-earnings (P/E) multiple, and that SeaCube could
eventually offer a dividend equating to a 7% or 8% yield, once
debt levels start to come down.
Action to Take --> The coming weeks will be an
interesting test for the IPO market. If these stocks get the
"analyst bounce" that I expect, then yet-to-be-priced deals will
start to be seen as post-quiet plays. This was a wining approach
in the 1990s and again in the middle of the last decade, and
could become so once again in coming weeks.
-- David Sterman
Staff Writer
StreetAuthority |
