IPO Stock Offerings

IPO Stock Offerings: $24 Billion Is About to “Go Public”

by Louis Basenese, Advisory Panelist, The Oxford Club
February 7, 2007: Issue #638

Editor’s Note: Louis Basenese, a former equities analyst at one of the nation’s largest investment banks, is The Oxford Club’s premier Initial Public Offerings (IPO) specialist. He is one of the only analysts in the country that issues buy and sell ratings on IPOs before their shares begin trading. Last year, 18 of his recommendations checked in with double-digit returns. Here’s his take on IPO stock offerings…

When the books were closed December 31, financial historians were already recording one important fact: 2006 shaped up to be one of the best years for IPOs since the dot-com boom. And investors made record profits on the deals…

Average returns for the 198 offerings checked in at 26% (with 50% of those gains coming in the aftermarket).
Total proceeds jumped 24% to top $43 billion.
And volume remained solid with an average of four deals pricing per week.

Here’s the thing: 2007 is shaping up to be another record-breaking year. Here’s why…

IPO Stock Profits Are Locked and Loaded

For one thing, the IPO pipeline is already overflowing… As of December 28, 2006, there were already 158 companies (representing roughly $24 billion) waiting to go public, according to filings with the SEC.

In fact, with 29 deals pricing, December marked the busiest year-end for IPOs since 2000. But this is not surprising. The correlation between market rallies and increased IPO activity is a proven fact.

Add a dormant Fed and a slowing economy to the mix, and IPO stocks with strong growth prospects should garner even more attention this year.

Not to mention, high-profile successes like MasterCard, NYMEX and Riverbed Technology are already spawning “copy cats” – companies in the same industries looking to tap into the public markets while conditions are favorable.

For instance, Visa, Chicago Board Options Exchange, and the American Stock Exchange all anticipate stock offerings in the coming year. Again, investor interest will be piqued – this time, because of high brand recognition.

And there’s plenty of liquidity to accommodate such high interest. Thanks to a record year for stock buybacks, private-equity buyouts and mergers and acquisitions, roughly $1.83 trillion in capital was freed up in the United States alone in 2006.

Expect IPOs to become an increasingly popular outlet for reinvesting. Especially since underwriters are now taking a more prudent approach to the boom.

In stark contrast to the dot-com days, underwriters are demonstrating a strong bias for companies with proven track records and improving fundamentals.

Case in point: 72% of the companies going public in 2006 were already profitable. And this preference for quality and reliability is just another reason for rising interest in IPOs.

Are IPO Stocks Stacked? Yes, But Profits Aren’t…

To be sure, some investors have reservations about IPOs. When world-famous technology banker Frank Quattrone went on trial recently for obstructing justice, it was alleged that he was trying to hide the way in which his bank, Credit Suisse First Boston, allocated IPO shares to its preferred customers.

In the end, Quattrone – who was making hundreds of millions a year at his peak – and Credit Suisse were on the hook for hefty fines. Still, the saga left little doubt that the IPO market is stacked in favor of Wall Street’s elite.

But you don’t need to be an institution-sized “preferred customer.” It doesn’t even matter if you don’t get in right away. Here’s why…

If you know how to judge the quality and movement of the offerings, you can realize sizable gains simply from buying shares when they hit the secondary market.

My Recommendation on IPO Stocks:

Don’t waste your time trying to overcome the usual obstacles of high account minimums and limited allocations in the initial market. After much effort, you’ll often be left with little to show for it.

Instead, take my lead. Here’s how I track down profits on IPOs…

The research starts with a focus on companies with sizable and sustainable growth prospects and manageable debt levels as well as companies that will use the bulk of their IPO proceeds to fund expansion, not enrich insiders. Doing so quickly weeds out the most speculative stock deals, and ensures you identify the hottest IPOs with solid long-term fundamentals.

Of course, if you can get an initial allocation with ease, go ahead. But ultimately, it’s not necessary. You can do just as well in the aftermarket, as the table below on the Top Performing IPOs of the last 12 months shows.

Good Investing,

Louis Basenese

Editor’s Note: Subscribers to Lou’s Hot IPO Trader, a service of The Oxford Club, had the opportunity to close out 18 double-digit gains in 2006 – including 95% in Riverbed Technology, 52% in Hercules Offshore, 50% in Chipotle Mexican Grill and 49% in Home Inns & Hotels Management, Inc. Yesterday, subscribers opened their newest position – a company posting average annual earnings growth of 32% over the last five years. Learn more about Lou’s Hot IPO Trader service.

Today’s Investment U Crib Sheet

To start your IPO research, here are two good resources for sorting through potential deals: www.retailroadshow.com and http://ipoportal.edgar-online.com/ipo/home.asp
This morning, Accuray Inc., a robotic medical device maker, raised the expected price of its planned initial public offering from $14 to $16 per share to $17 to $18 per share, indicating strong demand. Accuray will be listing 13.33 million shares on the Nasdaq under the symbol ARAY.O. JPMorgan and UBS Investment Bank are the lead underwriters for the IPO.

Shock Stocks

Cisco (Nasdaq: CSCO) shares jumped 4.3% to $28.45 after the network equipment maker’s quarterly earnings and outlook exceeded Wall Street expectations. The company said second-quarter net income rose nearly 40%. The stock is just below its 52-week high.

Shares of rival Broadcom Corp. (Nasdaq: BRCM) moved higher by 6%.

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