A dozen years ago, Silicon Valley was responsible for one of the
initial public offering (IPO)
markets ever seen. Many fortunes were made, as a record 486
companies went public in 1999. The next year was the second-best
ever, with 406 additional new issues coming to the market. Of
course, many dollars were subsequently lost in that mania and no
one wants a return of such frothy days.
But theIPO market is surely getting back on its feet. If theeconomy
obliges, we may get close to 200 IPOs this year, the best showing
since 2007. The good news is that the quality of newly-public
companies is fairly high, as investors only accept companies that
have real businesses and a true path to profits. The one blight on
market: China-based companies. The five worst performers of the
past 12 months in the new-issues market all hail from mainland
China, according to investment adviser Renaissance Capital. The
list is led by
China Xiniya Fashion (
, whoseshares have dropped 68%.
But in general, the after-market has been kind to new issues. The
eight-largest IPOs of the past three months have nearly all posted
strong gains. That's a testament to their quality -- and to
investors' interest in newly-public companies. The strong
performance of these stocks is likely to help grease the wheels for
the next large crop of new IPOs slated for release this summer. Of
the stocks on the table below, two stand out as having continued
1. Arcos Dorados (Nasdaq: ARCO)
This Argentina-based company takes its name from "golden arches,"
as it operates
McDonald's Corp. (
franchises in 20
. The appeal of this IPO isn't its value relative to 2011 results,
but instead the long-term positioning that could virtuallyguarantee
First, Arcos Dorados' exposure to quickly-growing middle classes
throughout South America looks to pay off handsomely. Many
countries in the region had been characterized by small elites and
large working classes that really couldn't afford to eat out much.
Nowadays, in countries like Brazil (which accounts for roughly
one-third of the company's nearly 1,800 restaurants), rising living
standards placed a great portion of the population into the middle
class. And this new group of consumers is eager to spend.
The other appeal is the status of the dollar. Some suspect that the
dollar will hold its value in coming years, but a growing group of
economists claims that any cure for the budgetdeficit and the trade
will have to come at the detriment of the dollar. If the dollar
indeed weakens 10% or 20% from current levels as it's predicted,
then investments in firms like Arcos Dorados could provide a solid
Right now, total sales are growing about 20% annually, led by
10-12% same store-sales growth. Both of those metrics are bound to
slow, but this could prove to be a steady 10-15%bottom line grower
for the near future, as management reaps continued operating
efficiencies over a rising store base and pushes margins up to
levels seen by Mickey D's. Right now, operating margins are only
60% of those seen by McDonald's.
2. Air Lease (
This is an intriguing new IPO. I'm a big fan of the
aircraft-leasing market, as it can be a powerfully profitable
business when air travel is expanding and demand for aircraft is
I recently profiled
, a competitor, which still trades well below
Air Lease, which completed an IPO in late April, isn't quite the
same bargain. That's because investors are willing to pay a premium
for the services of CEO Steven Udvar-Hazy, who has a strong
industry track record during the past 40 years. He's using the IPO
money to order yet more planes, which will help keep the fleet
quite young. As it stands, Air Lease's fleet averages less than
four years of age, which means they are the most fuel-efficient and
least likely to be pulled from service if the industry turns down.
If history is any guide, then Udvar-Hazy will use every tool in the
arsenal to boost the company's bottom-line, from well-structured
contracts to access to low-cost borrowings. This strategy could
make Air Lease the most profitable company in the business if the
continues to expand.
Action to Take -->
These two companies, along with patent risk management provider
RPX Corp. (Nasdaq: RXCP)
and natural gas storage company Golar LNG Partners (Nasdaq: GMLP),
all went public within the past 25 business days. This means new
analyst coverage will soon hit the wires, perhaps giving these
stocks an added boost.
Back in October, I discussed
how to play "
" stocks. The strategy works especially well for stocks that have
, but it could still be helpful for these recent IPO gainers.
-- David Sterman
Disclosure: David Sterman and/or StreetAuthority, LLC hold a
position in These two recent IPOs have great performance potential.
Find out about these stocks before the crowd catches on....