Judging by the number of companies that have lined up to pull
off an
initial public offering (IPO)
in coming weeks and months, we may be looking at a banner year. If
the performance of IPOs that made their debut since the year began
is any guide, investor interest is likely to be quite strong.
That's because virtually every company that has come public in 2011
is already trading up (except for Netherlands-based
Tornier (Nasdaq:
TRNX
)
which is off just 2%).
In fact, the biggest
IPO
of the year has just gone public. Hospital chain
HCA (NYSE: HCA)
, which is
going public
for the third time, sold $3.79 billion worth of stock today. The
fact that enough investors were corralled for the deal is a sure
sign of investor appetite for new issues. [My colleague Andy
Obermueller profiled HCA just last week.
Read his article here
.]
It always pays to look over the list of recent IPOs. First, you may
find companies that have only moved up slowly since their debut,
even as analysts are already starting to weigh in. Second, you can
check out the most recent IPOs that are still subject to the 25-day
quiet period
that inhibits analyst commentary. In many instances, analysts'
initial reports are quite bullish and you can capture a quick gain
on their new "buy" ratings.
Here's a group of IPOs that are so recent, that analysts have yet
to weigh in.
Among these most recent issues, clean-energy investors are
keeping a close eye on
Gevo (Nasdaq:
GEVO
)
, which is one the leading players of the second generation of
biofuels (corn-based ethanol plays are characterized as first
generation). The IPO has traded up 30% in the past month, and could
soon receive some fairly bullish research coverage. Yet it's worth
noting that these second-generation biofuels have yet to prove
their worth in the real world at large-scale production. High costs
mean they will only gain a strong foothold if oil remains above
$120, or the U.S. government provides hefty subsidies.
Gevo hopes to meaningfully ramp output in 2012 and looks to at
least be ahead of the rest of the field in terms of
commercial-scale production. This certainly merits further
research.
But what of the IPOs that have already been dissected by the
analysts? In some instances, bullish coverage yields only a
moderate gain and considerable upside remains. As an example, when
Internet communication firm
Broadsoft (Nasdaq:
BSFT
)
went public last June, itsshares remained stuck below $10 for more
than four months, and then took off like a rocket, recently trading
for $47.50.
Are there any Broadsofts in the 2011 IPO class? Probably not, but a
few names look quite appealing if you have more modest
expectations...
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My colleague Tom Taulli has
a very bullish view
of recent new issue
Velti (Nasdaq:
VELT
)
, which aims to capitalize on the fast-growing market of
smartphone-based advertising and marketing.
Indeed, the explosion of smartphone traffic, along with
ever-growing demand for video streaming, e-commerce and other
data-intensive activities is at the heart of my attraction to
Netherlands-based
Interxion (Nasdaq:
INXN
)
. Though it has only been public for six weeks, this company has
been around for more than a decade and possesses a blue-chip
customer base.
Interxion operates massive facilities across Europe where
corporations can put their equipment directly on the global
Internet backbone. In many instances, data traffic between clients
needs to travel just a few feet rather than half around the world
at these "data-colocation" centers.
It's a very profitable business for all of the major players.
Interxion, for example, generates operating margins approaching
40%. You can compare the company to U.S. rivals such as
Rackspace Holdings (NYSE:
RAX
)
or
Savvis (Nasdaq:
SVVS
)
-- but with a key distinction: Most companies also own and lease a
lot of equipment, but Interxion simply rents space to clients. That
removes a lot of the risk in thebusiness model , as Interxion
doesn't need to tie upworking capital with hardware and need not
worry about its gear becoming outdated.
Unlike many IPOs, this company could hold few negative surprises.
The company's customer base is locked into long-term deals, use of
the IPO proceeds is set to expand the company's footprint in places
like Dublin and Dusseldorf, and that is likely to boost an already
impressive
free cash flow
(
FCF
) profile. FCF could hit $1 a share by next year and perhaps $1.25
by 2013.
Shares
offer a 9% FCFyield based on that 2013 view.
Action to Take -->
I don't expect Interxion to soar far higher, but 25% to 35% upside
from current levels looks quite feasible in a year or so, after the
company develops a broader following as apublic company .
Overall, this is a great group of stocks to monitor. A number of
these newly-public companies will deliver a tough quarter some time
in 2011, as often happens with new IPOs that are still in
high-growth mode. That could lead to a punishing reaction for the
stock, which then often creates a great entry point as these
companies find their footing. For those who prefer tortoises to
hares in the IPO market, Interxion, along with
Neilsen Media (Nasdaq:
NLSN
)
and
Kinder Morgan (NYSE:
KMI
)
, are all solid companies with decent upside that should be
investigated further.
-- David Sterman
P.S. -- According to my colleague, a Russian "nuclear
catastrophe" will hit the United States in 2013… and when it does,
31 million American's will suffer. Amazingly, no lives will be lost
and a handful of energy stocks could rise hundreds of percent. I
know it sounds bizarre, but this bulletin explains what you need to
know…
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.