These Recent IPOs Could be a Real Bargain

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If you were angling for a piece of the Facebook (NYSE: FB ) IPO -- only to see it quickly drop -- then know that it could have been worse. You could have invested in stocks like Brightcove (Nasdaq: BCOV ) or Millennial Media (NYSE: MM ) . These 2012 IPOs (and many others are off 30%, 40% or even 50% from their recent peaks), highlight the real peril of chasing a newly-issued stock.

Sadly, it's to be expected whenever the market 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 offering , but just as often can deliver weak results in subsequent orders.

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 shares a day on average and have a market value 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 levels.

 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 the underwriting analysts offered up their predictably glowing reports and bullish 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 underwriter 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 price target ), 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 asset to larger companies struggling to adapt."

A sage veteran in the freshman class
Though most IPOs involve very young companies, U.S. Silica (Nasdaq: SLCA ) 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 challenging market.

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 far-sighted investors. 

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 crowd.

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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.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Investing Ideas

Referenced Stocks: BCOV , FB , MM , SLCA

David Sterman

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