initial public offering (IPO)
market continues to heat up with deals coming this week for
GM (NYSE: GM)
Booz Allen (
Caesars Entertainment (NYSE: CZR)
and a half dozen other firms. The flurry of deals puts us on track
for the most robust quarter for IPOs in more than two years. And
looking at the pipeline of new deal registrations, the first
quarter of 2011 may be even hotter.
I recently looked at a strategy that uses analyst research to find
stocks about to pop. [See: "
The Secret Way to Play IPOs
Yet that's not the only way to look for upside among recent new
deals. You can also scan lists for "broken IPOs," which are firms
that have been public for a short while and are drifting lower
while investors focus on more established companies.
I took a look
at top-performing IPOs, as I wrote back then, "many new IPOs take
time to find their sea legs and only take off well after their
debuts. In fact, every single stock [mentioned in that piece] came
out of the gate with a whimper and only started rising many weeks
or months after their debut."
The stocks in the table below are all broken IPOs, each is trading
off at least -15% from its
offering price. I've pored through the list and found the best
Complete Genomics (Nasdaq: GNOM)
Any company that struggles to fetch a desired
price is a conundrum for investors. On the one hand, a
lower-than-expected price is a sign that investor demand just isn't
there. On the other hand, you've got a chance to buy a stock at a
cheaper price than investment bankers have recently assessed. Case
in point, Complete Genomics, which hoped to sell shares for $12 to
$14, had to settle for a $9 offering price last Friday, and the
stock is now down to $7. That's just half the high end of the
expected range of pricing. The weak demand may be due to the fact
Pacific Biosciences (Nasdaq: PACB)
had just pulled off an IPO weeks earlier, snatching the attention
of any fund managers that buy these kinds of companies.
Complete Genomics is involved in DNA sequencing. While other firms
Illumina (Nasdaq: ILMN)
and Pacific Biosciences sell equipment to scientists, Complete
Genomics acts as a service bureau, performing third-party DNA
Why the tepid IPO reception? Complete Genomics is just starting to
generate sales and investors fear that quarterly losses will
continue for the next year or two, setting the stage for another
round of capital-raising. Ideally, the company would have waited
until sales started building and losses started shrinking, but its
backers likely balked at putting any more money into the company.
Yet this stock has all the makings of an IPO rebounder, as the
firm's underwriters, led by Jefferies, get set to publish initial
reports on the company in early December. You can expect to see
bullish forecasts of projected sales growth rates, and if you look
out far enough, fast-rising profits.
Analysts are likely to note that Complete Genomics' DNA sequencing
approach may prove to be very cost-effective and capable of high
. Industry leader Illumina can analyze an entire sequence of DNA
strands for around $10,000 in materials. Complete Genomics thinks
it can do it for just $4,500. And over time, prices could drop well
below that level, making DNA sequencing for the masses more
Action to Take -->
Keep an eye on new IPOs. They often stumble out of the gate, giving
the false impression that they are unworthy investment candidates.
Of the recent crop of IPO laggards, Complete Genomics appears to
have the greatest potential upside.
With a broken IPO and scant revenues, investors will need to focus
on the company's technology value. Complete Genomics is valued at
less than $150 million, roughly $20 million less than the money
spent developing its technology platform. The revenue profile tells
you that this is a risky as a biotech stock. But if the company can
make headway in the space, investors may start to make comparisons
to Illumina, which is valued at $7.2 billion -- 50 times more than
-- 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
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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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