If you were angling for a piece of the
-- only to see it quickly drop -- then know that it could have been
worse. You could have invested in stocks like
Millennial Media (NYSE:
. These 2012 IPOs (and many others are off 30%, 40% or even 50%
from their recent peaks), highlight the real peril of chasing a
Sadly, it's to be expected whenever the
hits rough sledding. These young companies are the first to be sold
off because they have limited operating histories and a fairly
short-lived investor base. In some instances, these sell-offs can
be quite justified -- in hindsight. After all, many newly-public
companies have a tendency to deliver a solid set of initial
quarterly results as they pump up the numbers for the
, but just as often can deliver weak results in subsequent
That's why it's often wise to wait until after the IPO dust has
settled. After a stock has fallen sharply from the post-IPO
euphoria, you're likely to have a chance to buy in after others
have exited the stock.
I went through the list of all companies that have come public
this year, focusing on those that trade at least 100,000
a day on average and have a
of at least $200 million. A dozen of these companies are now at
least 30% lower than the levels seen in the post-IPO euphoria
phase. And a few of them look quite compelling at these now lower
Brightcove, which provides video delivery services to
major media organizations, is a classic case of how an IPO can
fail. The stock opened well above its $11 offering price in
mid-February, and really built a head of steam into late March when
analysts offered up their predictably glowing reports and
price targets. But reality set in by early May as the company
issued its first quarterly press release. Forecasts that second
quarter sales would be flat or even a bit lower sequentially is not
what investors expected to hear, and shares have been sliding ever
since. This is why I like to see at least a few quarters under a
company's belt before wading in.
In a lousy market like we're in right now, investors tend to
flee from unprofitable companies. That's because the prospect of a
still-weaker market ahead may make it hard for these companies to
raise fresh cash if they burn through their existing funds. That's
been an additional concern for Brightcove's investors, and it has
also been weighing on shares of Millennial Media. The firm is a
fast-growing provider of mobile advertising software, and unlike
Brightcove, delivered a generally solid quarter.
Kudos to analysts at Goldman Sachs on this stock, because they
resisted the urge to glow about the stock simply because their firm
was a leading
for the IPO. These analysts picked up coverage on May 8 with a
"Neutral" rating, noting that after a post-IPO spurt, the $19 stock
price already reflected a "premium valuation." A week later, the
company issued solid quarterly results and impressive forward
guidance, but the tough market was dragging shares down anyway. A
few days later, on May 17, Goldman boosted the rating to "Buy"
(with an $18
), noting that "mobile remains the fastest growing segment of both
consumer media consumption and advertiser spending. Millennial's
position as the leading independent mobile ad platform makes it a
key beneficiary of this growth and a potentially important
to larger companies struggling to adapt."
A sage veteran in the freshman class
Though most IPOs involve very young companies,
U.S. Silica (Nasdaq:
has been around for more than 100 years. The company makes a wide
range of sand/silica products such as paint additives, glass and
fracking solutions. Based on the company's long track record,
underwriters figured $17 was an appropriate price for the January
2012 IPO. Shares quickly zoomed to $22, perhaps in a bit of
misplaced euphoria, but have since crashed down to $12 in this
Yet this has all the makings of a growth stock, despite the
lousy reception. The company expanded a key production site in
Ottawa, Canada in late 2011 which should enable a steady rise in
output. This is leading management to target new market niches such
as resin-based coatings.
U.S. Silica's sales are expected to grow roughly 40% this year
to around $420 million before rising another 20-25% to around $515
million in 2013. Per-share profits are expected to grow at a
similarly-fast clip, growing more than 50% this year to around
$1.40 before hitting $2 in 2013. It's not clear what kind of
price-to-earnings (P/E) multiple this stock deserves, but its
current forward multiple of just six appears too low.
Risks to Consider:
Further drops in the market could lead to even lower prices for
these stocks because they lack the operating history to attract
Action to Take -->
I've only discussed the first three stocks in the table above. The
rest of these companies are surely worthy of further research.
These stocks are in the penalty box right now, which makes this a
good time to research them while others shun them. And if you find
a stock worthy of buying, then you'll likely be ahead of the
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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