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IPO Investing: Three Growth Stocks About To Hit the Initial Public Offering Market
by Louis Basenese, Advisory Panelist, Investment U
Associate Investment Director, The Oxford Club
Monday, January 15, 2007: Issue #628
The IPO investing market had a stellar 2006. More than $43 billion was made from initial public offerings. And 2007 is setting up to be another banner year…
As of December 28, 2006, 158 companies were waiting to go public. Five of which are priced and ready to launch within the next few weeks.
One of the biggest misconceptions about IPOs is that you can’t win big if you don’t “get in” before the newly issued stock hits the market. It’s assumed that the gains are reserved for accredited investors and investment bankers. According to Louis Basenese, The Oxford Club’s IPO specialist, that’s not the case at all.
Today we asked Lou to show us why, and how average investors can capture just as much of the upside. Here’s what he had to say, plus the three IPOs on his watch list…
Where Most Investors Get Started IPO Investing
Investment U: The IPO market can be a great source of wealth. MasterCard (NYSE: MA), for example, has more than doubled since its debut in May. But how can you make money on an IPO if you’re not an accredited investor, someone who can buy the shares of the initial offering?
Louis Basenese: Play the aftermarket. The “aftermarket” is just another word for the public market, where anyone can buy the shares once they begin trading. Too many investors falsely believe all the profits are taken by those that get an initial allocation. And that’s simply not true.
For instance, last year, the average IPO returned 26%, nearly doubling the return of the S&P 500. More importantly, though, 50% of this out-performance came in the aftermarket.
And remember, these are just the averages. If you purchased shares of Riverbed Technology (Nasdaq: RVBD), MasterCard or Omrix Biopharmaceuticals (Nasdaq: OMRI) on the second day of trading, you would be sitting on gains of 95%, 129% and 223% (as of yesterday’s close).
How to Recognize IPO Opportunities
Investment U: What’s the #1 characteristic you look for when considering an IPO in the aftermarket?
Louis Basenese: As far as selecting the hottest IPO opportunities, I focus on companies with significant and sustainable growth prospects. Take Home Inns & Hotel Management (Nasdaq: HMIN), for example.
It’s an operator of Best Western-style hotels in China. In the first five years of operation, the company opened an impressive 82 locations. In the next year, it plans to open at least another 60. Pre-IPO, revenues were up 129% in just six months. And this was just scraping the surface.
With China’s billion-plus population enjoying more disposable income and traveling more, it’s clear the economy can support more than 142 locations. Just consider, in the U.S. alone, Best Western boasts more than 2,200 locations, with a considerably smaller population.
Given this obvious growth opportunity, it’s no surprise shares of HMIN now trade 48% higher than its first-day close.
Investment U: What else do you look for, in addition to growth prospects?
Louis Basenese: Profitability. Most investors got burned during the dot-com days because they scooped up any old business, including those with absolutely no profits or revenues. Back then, it was hard not to do, since only 25% of companies going public in 1999 and 2000 were profitable. In the end, a company that’s already profitable, with strong growth opportunities, is likely to remain so. And share prices should quickly reflect the same.
The Oxford Club’s 3 IPO Investing Recommendations
Investment U: What are some of the IPOs coming to market that you’re keeping a close eye on?
Louis Basenese: There are three deals I’m intently following: American Stock Exchange, the Chicago Board Options Exchange and MetroPCS.
The first two have not officially filed plans for an IPO with the SEC, but it’s widely expected to happen soon. Both are plays on the growing popularity of exchanges, as evidenced most recently with the NYMEX (NYSE: NMX), and the expected industry consolidation.
As for Metro PCS, it’s a cellular phone service provider that focuses on undeserved markets by offering no long-term contracts, flat rates and unlimited calling. It’s profitable, and likely to experience significant growth in the near term as it enters new markets such as New York, Philadelphia, and Boston.
It could be a takeover target, too. Competition is intensifying, and the nation’s larger carriers need to rely on much more than a new phone to drum up new business.
Investment U: Thanks, Lou.
Louis Basenese is a former securities analyst at one of the country’s largest investment banks. He is now an Advisory Panelist of The Oxford Club and the Editor of the Hot IPO Trader, a specialized trading service for booking fast gains in newly issued stocks.
Today’s Investment U Crib Sheet
- Metro PCS Communications, Inc., based in Dallas, is one of two IPO that have been filed this month. The other is GSI Technology. This company designs and markets specialized circuitry for networking equipment. Details of this offering have not yet been released.
- To make sure that newly listed shares are stable when they hit the market, the underwriters of the deal (investment banks) have the company’s insiders sign a “Lock-Up Agreement.” This is a contract that prevents corporate executives from selling their shares when the stock begins trading. The lock-up period is usually 180 days.
Shock Stocks
Shares of Riverbed Technology Inc. (Nasdaq: RVBD) jumped 49% when the company went public on September 20. And they haven’t looked back
The offer price on the IPO was $9.75. And on their first day of trading, shares opened at $14.60. Since then, they’ve more than doubled in the aftermarket – where anyone can buy the stock. It’s currently trading for about $31 a share.
- Small Cap Gains: 2 IPOs the Entire Market Should Be Watching
- Tech IPOs Are Back… But Don’t Buy This One
- Look Before You Leap into the DGI IPO: Watch out for these 4 Big Risks
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In addition to being the foremast expert on small-cap stocks, Louis is also well versed in special situations including IPOs, mergers and acquisitions, spinoffs and contrarian investments. His commentary has been featured in several media outlets, including MarketWatch. And he's also a top-rated speaker at financial conferences throughout the country. 
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