It's essential that a newly-public company remain in focus for
investors. With enough attention, these new issues can climb
steadily higher as the appearance of success draws more investors
in. But if a company stumbles after an
initial public offering (IPO)
, then it can start to drift lower and lower as many investors
simply lose interest. Analysts become disenchanted as well, as
their clients don't want to hear about the dud
anymore, so the analysts often just stop covering the company.
But this is exactly when you should start paying attention.
You can often lump these "busted IPOs" into the same group. They
typically pull out all of the stops to deliver strong quarters just
before and after the IPO comes to
. But soon thereafter, reality sets in as quarterly results lag
overly optimistic forecasts and
fall out of bed. The good news: Many of these companies still
possess bright long-term
, and their post-IPO stumbles can create fresh openings for
investors who are just getting up to speed.
In the table below, you'll find a select group of 2011 IPOs. Each
one of these IPOs is now at least 25% below its offering price. In
many cases, they actually traded up on their debuts and are closer
to 50% off the
. (I weeded out stocks that are now worth less than $200
Some of these deals were seen as "can't miss." For example,
for-profit hospital operator
HCA Holdings (NYSE:
was such a large and well-established company that many assumed it
would find a stable home in the portfolio of many
. But investors have cooled to HCA and its peers for fear that
government reimbursement rates will soon fall. Merrill Lynch
considers HCA to be the best play in the health-care facilities
sector, thanks to prodigious
, but concedes that "2012 will once again be a tale of two cities,
as operationally, double-digit
growth is in the cards, but stock performance should lag most of
the year as government reimbursement concerns weigh on stocks."
Even George Soros makes mistakes
Back in June, I noted how
George Soros spent more than $300 million
on South American agriculture play
He may not have guessed that Argentina would subsequently
contemplate restrictions on new purchases of Argentinean farmland
by foreign entities. That concern has pushed this stock down more
than 30% from its 52-week high, and Soros is now underwater with
this trade (He sold some stock recently but maintains most of his
position.) The good news: The restrictions would only apply to new
purchases, so Adecoagro's current holdings are safe.
Just a snapshot of the current business -- assuming zero-growth
prospects -- makes this stock look quite appealing now that it has
shed a third of its value (from the peak). The company owns
farmland appraised at $900 million, its sugar/ethanol refining
operations throw off more than $120 million in annual
(and would be worth $600 to $750 million on the open market,
assuming a 5x-6x EBITDA multiple), and its other farming operations
generate roughly $80 million in annual EBITDA.
Add it up, and you've got a set of assets that are worth well more
than the current $1 billion
, by the way, will only appreciate in value as Adecoagro continues
the process of converting cattle-grazing land into productive
farmland. George Soros may be underwater with this name, but he
stands to reap ample profits as the Latin American agricultural
boom gains steam.
Although Adecoagro looks like the most intriguing play of the class
of 2011's broken IPOs, a few more stocks are worth additional
This Russia-based web portal has been hurt by concerns that the
Russian business climate is growing harder to navigate as Vladimir
Putin strengthens his grip. The converse also applies. If the
recent Russian protests
tangible electoral reform, then the perception of the Russian
business climate will sharply improve, and Yandex remains the best
"Russia play" for U.S. investors.
Yandex controls 60% of the traditional Russian search-engine
is the dominant player in mobile search. Shares have weakened on
concerns that Google will extend its mobile search dominance into
desktop search dominance, an issue worth exploring before buying
into this name.
RPX Corp. (Nasdaq:
This is an unusual "patent troll" firm. It seeks to buy up the
rights to many technology patents and then get companies to pay for
licenses to use the patents. But unlike some firms in this niche,
RPX doesn't look to simply find patent infringers and sue their
pants off. Instead, it tries to work collaboratively, generating
subscription revenue for the patents. The model seems to be
working. RPX now has 103 clients, up from 65 a year ago, and is
generating about $40 million in high
revenue each quarter.
Still, it's awfully hard to figure out a value for this business.
Investors in other patent-owning firms such as
Acacia Research (Nasdaq:
have always had to model future cash flow that may or may not come
RPX was a very popular stock when it went public in May, and its
shares briefly moved above $30. The euphoria has since worn off
(perhaps because investors couldn't figure out a
), and shares have slumped to just $12. Merrill Lynch sees a
rebound coming, back to $28, which would be 34 times their
projected 2012 earnings-per-share (
) forecast of $0.83. Why such a rich multiple? Beats me. Then
again, with shares trading for less than half of Merrill's target
price, this busted IPO is surely worth more research.
Risks to Consider:
Broken IPOs can languish for an extended period until the
underlying business trends are so solid that the valuation
disconnect can no longer be ignored.
Action to Take -->
Young companies go through a predictable life cycle. These recent
freshman are already well into their sophomore slump, but like many
students, results should improve as they become upperclassmen.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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