We're in the final stretch of 2011, and I say good riddance! The
has been so volatile, I've exhausted my supply of Pepto Bismol.
This up-and-down nature of the market is really evident when you
initial public offering (IPO)
deals. It's been cold, hot, cold and hot again. But I'm still
convinced that it brings opportunities for investors to make money.
Indeed, the sharp market drop in August and September led many
companies to quash their
plans in October. A robust market rebound in October led these
companies to scramble to the IPO gate, causing November to have 13
IPOs -- highest number this year. Not surprisingly, renewed market
weakness in November will likely close the window for IPOs in
December. We'll probably have to wait until at least early 2012
before any major new IPOs hit the tape.
But you can still
from the recent IPO rush by playing the "quiet-period bounce."
Analysts who work at the firms that helped conduct an IPO must
refrain from making any comments for 25 business days after the
stock is priced. Considering less than 15% of all analyst
recommendations are a "sell," you can count on subsequent reports
that will gush about a newly-public company's growth prospects.
Positive Wall Street coverage can help spark a flagging IPO back to
life. The key is to focus on stocks that haven't already taken off
and are still trading near or below their IPO price.
, for instance. These two companies are already trading more than
45% above their IPO price, so it's highly unlikely analysts will
come up with a fresh
that's much higher than their current price. Notably, only one
other November IPO is up more than 10% from the offering price, as
you can see in the table above, so the "quiet-period bounce" could
become quite pronounced in December -- if the broader market
It's noteworthy that the biggest IPO of the month has been a total
were initially priced at $20, but saw such heavy demand that the
stock opened at $28. After a brief spike above $30 on its first
trading day, on Nov. 4, it has now fallen more than 40% from that
peak. On that same day,
Groupon's $18 billion
made little sense.
What about its current $10.8 billion market valuation? I still
think it's too rich, but I wouldn't short the stock just yet.
Indeed, some analysts are likely to rave about the
, mimicking the
tone that their investment-banking counterparts took when trying to
sell this deal. That's an argument for going long for now and
shorting the stock after research reports have been digested. (Look
for reports around Dec. 9.)
Of course, some stocks are unlikely to move much at all as they are
. I'm talking about energy players such as
EnduroRoyalty Trust (Nasdaq:
Chesapeake GraniteWash (Nasdaq:
and agriculture stock
Rentech Nitrogen Partners (Nasdaq:
. Of these, only
is the only one likely to see a decent pop, because analysts are
likely to suggest a target price at or above its $22 IPO price,
implying perhaps 20% upside.
Yet two IPOs are surely worth a close look ahead of likely positive
Auto parts maker
Delphi Automotive (Nasdaq:
has been the victim of continuing skittishness regarding the entire
automotive industry. This apprehension has led shares of
and others to perform under pressure for most of 2011 on fears of a
looming slowdown. Yet actual monthly sales figures have been solid,
and a preliminary read on November sales figures for cars and
trucks implies another solid performance. I still expect the auto
and auto-parts stocks to post a solid rebound in 2012, as the
worst-case scenarios the market is anticipating don't come to pass.
If this happens, then Delphi is likely to get a boost from this
improving sector sentiment. The fact that you can get the stock for
a 10% discount to the IPO price is an added
I'm also quite intrigued by the recent drop in
Angie's List (Nasdaq:
, which had the bad fortune of following in Groupon's wake. Yet a
market value that is just 6% of Groupon's tells you the bar is a
lot lower for this provider of consumer reviews. Subscribers get
real-time, candid feedback on local suppliers such as contractors,
cleaning services and other local merchants -- sort of a Better
Business Bureau that is more on the consumer's side and less on the
Right now, the company appears to have solid momentum, with
third-quarter sales rising more than 40% to $63 million from a year
ago, and 1 million subscribers in the fold. Perhaps the tepid IPO
response is the result of fears that the company can't sustain such
robust growth. After all, growth only took off in the past few
years (thanks in part to pre-IPO funding that boosted the company's
visibility). Its revenue base isn't large enough to generate
To be sure, Angie's List faces rising competition and it's hard to
know where the stock will be in a few years. It's a lot easier to
guess where it will be in a few weeks. This is precisely the kind
of stock that gets a solid lift from analyst research. Analysts are
going to simplistically generate a two to three-year growth rate
that mimics the recent growth. So look for projected sales growth
of at least 30% in 2012 and again in 2013. This should be enough to
show pro-forma profits and enough to justify a target price in the
mid to upper teens.
This may seem like speculative meta-analysis, but it has happened
hundreds of times in the past decade. At a minimum, it's
overwhelmingly unlikely that any
analyst will come out and speak negatively about this business
model so soon after the IPO. The investment bankers and the
underwriting firms hate to see such negative follow-on coverage. It
hurts their reputation. So Angie's List may (or may not) be a good
long-term investment, but it's more surely a good near-term trade.
Risks to Consider:
What will December bring? More pain and misery for many stocks,
I'm predicting. If so, then these IPOs could soon lose any momentum
they have as investors tighten their portfolios to have only long
holdings of established companies.
Action to Take-- >
If you've been eyeing a recent IPO, then now may be the time to
bounce, as imminent analyst coverage could provide a short-term
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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