Small Cap Gains

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Small Cap Gains: 2 IPOs the Entire Market Should Be Watching

by Louis Basenese, Advisory Panelist
Senior Analyst, The Oxford Club
Wednesday, February 4, 2009: Issue #928

Write this date (Feb. 11)… and these new IPO tickers down (OGAR and MJN).

Last week, we got the most bullish indicator for a small-cap rally yet. However, most investors didn’t catch it. And it received scant attention in the financial press, too.

But ignoring it could be a big mistake, as it could usher in the first round of sizeable small cap gains (50% or more). And I certainly don’t want you to miss out, so let me bring you up to speed…

We all know most investors abhor risk right now. That’s why they’re buying Treasuries at a zero yield, hoarding gold, or sitting in cash. And that cash pile rests at an 18-year high of $8.85 trillion, according to Bloomberg.

And who can blame them? Given the economic backdrop of soaring deficits, terrible earnings and a flat-lined housing market (to name a few issues), a little certainty in an uncertain world should be coveted.

Small Cap Gains: 5 IPOs in One Week IS a Big Deal

Here’s the thing – such an understandably risk-averse sentiment makes it all the more unbelievable that five IPOs are slated for next week.

That’s not a typo. Five companies plan to price initial public offerings next week. And that just defies every ounce of conventional wisdom.

You see, without fail the IPO market has always mirrored the broad market. In bull markets, the deals come fast and furious. In bear markets, they don’t come at all. Clearly, we’re still in a bear market. So why then the flurry of activity, after a 10-week layoff? (The last IPO to grace the markets was Grand Canyon Education (Nasdaq: LOPE) on November 20).

I don’t know. But the “why” doesn’t matter. What matters is the “how” – as in, how will they perform?

5 Deals = Shift In Investor Sentiment Towards Risk

If all five deals get out the door – that is, if the underwriters don’t postpone or cancel them at the last minute – it will signal a dramatic shift in investor sentiment and their appetite for risk.

Sorry, but there’s no denying buying a young company, with untested prospects, in the throes of a bear market is risky behavior. It redefines risky in this market. It’s the equivalent of someone cashing in their unemployment check, with three hungry kids at home, and instead of the grocery store, heading straight to Vegas – to play at the high limit tables, no less.

But we shouldn’t question the reasons behind the potential shift. We should just monitor it. As I’ve learned countless times, even subtle shifts in investor sentiment can lead us to big profits.

In fact, studying shifts in sentiment is what originally led me to recommend going long the U.S. Dollar last March, short oil last June and short Treasuries just over a month ago. Each of which were downright unthinkable trades at the time. But undeniably profitable.

So let me be perfectly clear. If you do nothing else next week, at least keep an eye on the IPOs. If they perform well, it’s time to go “all-in” on small caps. And that’s simply because all five deals are small caps. And if investors are willing to take a big risk on five unproven small stocks, they will certainly start taking risks on small caps with proven business models and quarters worth of double-digit earnings growth.

If you want to read up on each deal, I recommend you go to www.retailroadshow.com and check out each IPO prospectus and presentation. If that’s of no interest to you… or you’re just strapped for time, no bother.

Focus on This IPO Pair For Small Cap Gains

Only two IPOs next week really matter for small cap gains:

The O’Gara Group (Nasdaq: OGAR proposed)
And Mead Johnson Nutrition Company (NYSE: MJN proposed).

Both sport solid growth fundamentals, possess significant competitive advantages, operate in underpenetrated multi-billion dollar industries, and are profitable – a rarity for most IPOs. They are the cream of next week’s IPO crop, and the ones that would normally attract the most investor interest.

And here’s what I’ll be looking for specifically. Each IPO should:

Price at the midpoint of the proposed range or higher.
“Pop” or increase in price once trading begins.
Close the day above the offering price.

If all three happen for either one of these deals, it will confirm that both institutional demand (they’re often the only ones that get to purchase an IPO at its offer price) and individual investors are warming up to risk in a big way.

And coupled with all the data I’ve provided about small cap stocks and small cap investing, that’s a telltale sign that the small-cap rally I’ve been predicting, which always accompanies the end of a recession, is underway.

Again, if you do nothing else next Wednesday, February 11, monitor the price action in OGAR and MJN. And treat a strong debut by either as the last call to invest in small caps before they make their big move.

Good investing,

Lou Basenese

Editors Note: If you want to get one-step ahead of the small cap rally, and identify the big movers before the rest of Wall Street, check out Lou’s new advisory service – The White Cap Report. It does nothing but uncover small cap gems, destined for double- and triple-digit gains.

In fact, Lou just closed out a 50% gain – in less than a month. To get ahead of gains like these, sign up to The White Cap Report now.

Today’s Investment U Crib Sheet

The IPO market can be confusing and often has an air of exclusivity to it. But that just isn’t the case. Here are some of the most common misconceptions below:

Can you make money on an IPO if you’re not an accredited investor – someone who can buy the shares of the initial offering?

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.

What is the #1 characteristic to look for when considering an IPO in the aftermarket?

Focus on companies with significant and sustainable growth prospects. Just because a stock is being listed, it doesn’t make it investment worthy. As with any stock purchase, know what you are buying and make sure you do your research.

Won’t most insiders dump their shares as soon as the stock becomes public?

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.