Rosetta Stone IPO: Good Risk / Reward Trade Below $20

Apr.16.09 | About: Rosetta Stone (RST)

Rosetta Stone: Strong pricing of I.P.O. should mean a good risk/reward trade for the next month

Wednesday evening language instructor Rosetta Stone (NYSE:RST) priced 6.25 million shares at a stronger than expected $18 a share through an offering led by Morgan Stanley (NYSE:MS). Pricing had been expected between $15-17. The shares will begin trading on the NYSE under the symbol “RST” Thursday morning.

The strong pricing of this I.P.O. shows how hungry the market currently is for growth companies. While most consumer oriented companies are happy to simply make estimates these days, Rosetta Stone has been growing its revenues mightily the past few years. In 2008, RST’s revenues grew 52% to $204 million, with net income of $13.9 million.

While these numbers are impressive, one has to wonder why insiders are selling 3 million shares in this I.P.O. If business is poised to keep growing, why would they be selling so much stock themselves?

Even with these insiders ringing the register, I still think the stock is a buy Thursday on the opening as long as you can get it for under $20. With the market devoid of many niche growth companies, look for institutional investors to jump right into RST on the opening Thursday and for a quick move into the mid-20s by next month.

While it is not the next Google (NASDAQ:GOOG) or Netscape, buying RST for under $20 Thursday seems to offer a good risk/reward on a trade that will not blow up on you and should provide you with quick upside as the market rewards any and all companies that are able to grow nicely through this recession.

Disclosure: I am not long the stock but will be Thursday morning as long as I can get stock for under $20.