A surging stock market has brought a smile to the face of
investment bankers. They've suddenly found a much more receptive
environment for new initial public offerings (IPOs), with 16 deals
of at least $100 million being pulled off in October -- the best
month for IPOs this year. And the pipeline of fresh offerings is
starting to fill, which means that the whole fourth quarter could
prove to be a very active period for IPOs.
Notably, nearly half of October's IPOs were based in China, though
that proportion should diminish in coming months. Yet a word of
caution about China-based IPOs: These companies tend to disappoint
investors after a quarter or two, either by missing expectations
that were too high, or meeting those expectations and then quickly
doing a
secondary offering
to raise yet more money.
In a moment, we'll look at October's crop to find the best ideas,
but we should first recall the "
quiet period
" play, and how you can profit from it. After a company is taken
public, its underwriters are forbidden from writing about it for a
period 25 business days. But when their mouths are unzipped, they
often gush, giving the stock a fresh bounce. So many investors like
to find attractive-looking new companies and buy shares soon before
the quiet period ends.
Generally speaking, analysts will only speak cautiously of a fresh
stock if it has already had a strong run since the
IPO
. So looking at the table below,
China Cache (Nasdaq: CCIH)
,
TAL Education (
XRS
)
, and
Vera Bradley (
VRA
)
are unlikely to see much of a push from analysts. (The analyst
bounce can only come from IPOs that were brought public by large,
reputable underwriters, which applies to all the names on this
list).
China Ming Yang Wind Power (Nasdaq: MY)
is the classic slow-to-build
IPO
. The company's efforts to sell the deal were apparently
underwhelming (as can be the case with many China-based IPOs, where
management's English-language proficiency is not up to snuff yet).
Yet this is precisely the kind of business for which analysts gush
as soon as they can. First, the company is seen as a technology
innovator. Second, it has a large and growing
backlog
. And third, the Chinese government's support of clean energy firms
-- especially those that have a solid shot of cracking export
markets -- means that demand should stay robust.
But be ready to move quickly if the stock gets a solid bounce from
analysts. That's because many rivals are lining up to go public as
well, and this industry may soon suffer from too many
newly-capitalized firms that all rush to add capacity at the same
time with their IPO proceeds. And higher industry capacity often
spells price wars -- not a good thing for Ming Yang, which has yet
to even show a full-year profit and may never generate anything
more than tiny profit margins once competition really builds. So
this may be more of a good trade rather than a good investment. The
quiet period for this stock ends this coming Friday, so you've got
a relatively small window to try and play the "quiet period"
bounce.
In a similar vein,
Global Education & Technology (Nasdaq: GEDU)
may get an analyst-led pop in mid-November. But this education
firm, along with its other China/education peers, looks awfully
expensive based on traditional metrics and would need to be a good
bit cheaper to be found fundamentally attractive for long-term
investors.
The Thanksgiving IPO bouncers
Later this month, we'll see analyst coverage possibly boost more
recent IPOs. For example,
NetSpend (Nasdaq: NTSP)
, which StreetAuthority contributor Tom Taulli wrote about, has
quickly become a force in the prepaid debit card market. [
Read Tom's article here
] As long as analysts are willing to overlook the taint associated
with troubled financial firm
Meta Financial (Nasdaq: CASH)
, you can expect to see quite bullish reports.
Soon after Thanksgiving, analysts will weigh-in on
Pacific Biosciences (Nasdaq: PACB)
and
Examworks (Nasdaq: EXAM)
. The former is a speculative but intriguing play on the ability to
rapidly sequence DNA -- the company has a strong technology base,
but also strong rivals. The latter is a solid, experienced firm in
anti-fraud efforts. Both of these stocks should receive glowing
analyst coverage.
The month's last IPO,
SeaCube Container (
BOX
)
, is arguably the best value play of the whole group. The company's
fully-rented fleet of specialized shipping containers means that
cash flow
is robust and more than ample to cover the company's still-high
debt load
.
SeaCube's bankers thought they could get $16 a share in the IPO,
but had to cut that price to $10. Investors are shunning most
shipping-related stocks, but this one may have been unfairly
tarnished, as it has a more solid
business model
than firms like
DryShips (Nasdaq: DRYS)
. At this lower price, analysts are likely to note that shares
sport a single-digit price-to-earnings (
P/E
) multiple, and that SeaCube could eventually offer a
dividend
equating to a 7% or 8%yield , once debt levels start to come down.
Action to Take -->
The coming weeks will be an interesting test for the IPO market. If
these stocks get the "analyst bounce" that I expect, then
yet-to-be-priced deals will start to be seen as post-quiet plays.
This was a wining approach in the 1990s and again in the middle of
the last decade, and could become so once again in coming
weeks.
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
More...
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.