March started slowly but picked up at the end of the month with a total of 11 deals priced. We saw 14 new filings in March, which is pretty good considering more companies are taking advantage of the confidential filing option.
With the exception of Pinnacle Foods (PF) the deals priced in March fell into business/financial, information technology or biotechnology:
Of the 14 new IPO filings in March these are the ones that stood out for us:
Rally Software (RALY): With "software eating everything" these days the ability to develop it is as important as ever. Rally provides tools and processes for companies to build software that is better aligned to business needs and easier to adapt to a rapidly changing world. Rally has annual revenues of $56M with operating losses of $8M. Deutsche Bank and Piper Jaffray are leading the $72M deal, which equates to a $275M market capitalization.
Blackhawk Network Holdings (HAWK): This is a $1B revenue scale company distributing prepaid gift cards for a broad array of retail applications. The company is profitable. Goldman Sachs is leading a large posse of banks on this transaction. Deal pricing and valuation figures are not yet available.
CDW Corp (CDW): This major IT product distributor handles over $10B in products every year. CDW has been able to improve their slim margins over the last few years and generated $119M in net income in 2012. Pricing and valuation figures are not available yet but we can expect a large deal based on co-lead banks JP Morgan, Barclays and Goldman Sachs.
The filings also include four more development stage biotechnology companies and four additional financial/real estate related deals.
Of the deals priced in March the standouts were Artisan Partners +32%, Model N +27%, Aviv REIT +22% and Enanta Pharma + 46%. Quite a few deals were flat to down small with only one (Professional Diversity Networks) off sharply from pricing.
As we enter April we note five companies entering active marketing including Chimerix, Knot Offshore Partners, Omthera Pharma, Rally Software and Taylor Morrison Home Corporation.
With the NASDAQ composite up 7.8% already YTD (and 14% since mid-November 2012), many investors are expecting some correction. So far the market has been "risk on" and has not been concerned by weak results from leading technology companies like Oracle (ORCL) and VMWare (VMW).
Expectations for Q1 reports may be a bit high and could serve as a catalyst for at least a 2-5% decline in the market.
March was yet another good month for IPO stock performance. The ecosystem was up 3% for the month. The top 10 names were up 44% and the bottom 10 were down 27%.
TOP 5 in March
Wireless Network Equip
SemiLEDS (LEDS) shares have been helped by a surge of investor interest in the LED space now that LED-based light bulbs are entering early adoption by mainstream consumers. LEDS is now trading at their cash value but they are burning cash.
The potential for microRNA-based science to help large companies like AstraZeneca (AZN) produce new drugs was in the news in March. This propelled the stocks of related companies like ISIS Pharma (ISIS) and Regulus (RGLS).
Meru Networks (MERU) saw strong demand for a secondary offering in late February, which was done at $4/share. Since then the company has benefited from additional research coverage.
Ambarella (AMBA) has surged on a combination of strong near-term results and market share gains in video processing in vibrant markets like sports cameras, integrated video in automobiles and IP security cameras. Lockup expiry is around April 8th.
BOTTOM 5 in March
Ming Yang Wind
China Wind Turbines
Velti (VELT) missed Q4 estimates and received multiple downgrades. Given the importance of mobile advertising, the weak results suggest that Velti may not be capitalizing on the opportunity.
We will be removing China Lighting (CIL) from our ecosystem as this is another bizarre Chinese deal that turned out to be more form than substance. Back in May of 2011 we commented: "To me this just reinforces the lesson that when it's hard to get a crystal clear picture of what the company really does and what their very specific value add is one should stay away."
Millennial Media (MM) is yet another mobile advertising company missing expectations and is having a hard time generating business. Some firms defended the company but few have visibility on what is going on with their business.
Investors didn't like the sound of the cash burn from Supernus (SUPN) but insiders have been buying at current prices ($5.36).
We couldn't find strong evidence to link to the rise in the shares of ClearSign Combustion. This development stage company provides technology to improve engine performance. Traders are probably "liking the chart" now but this micro-cap company may also be close to signing some kind of a deal.
IPO Candy Folio Update
The IPO Candy Folio was up 2.7% for March and is off to a good start for the year with a YTD gain of 8.14%.
We are doing an "about-face" on XOOM (XOOM) after adding it as a 6% position last month. We were shocked by the low quality of their customer support after trying what looked like a very well-developed new platform. We have some more work to do but there was a "ponzi scheme" feel to some of the promotions they were doing and we don't feel comfortable with the shares now.
Our decision last month to increase our exposure to Tesla (TSLA) was timely and we are keeping it at 6%.
We're taking a bit of a stand at this point in the market by not adding any new positions and increasing our short exposure to 20%. Cash stands at just over 16%.
Our strategy is not to time the market, but with strong YTD performance, high expectations and signs that Q1 reported results may just be mediocre it feels like a time to take a pause. April may offer some opportunities to increase exposure and reduce our short position.
The Pipeline of Deals and Events
There are six deals in active marketing now after a slow week at the end of March. We should observe a fairly steady increase in the number of deals in marketing through the Spring.
Coverage & Lockup Expirations
April will be a relatively quiet month for new coverage with 7 new stocks scheduled for initiation between April 14th and April 30th.
There are many (20) lockup agreements expiring in April and a weak post-Q1 market could accelerate some insider selling. Stocks like Regulus , Ambarella , Shutterstock (SSTK) and Workday (WDAY) may be especially vulnerable.
Research and analysis services provided by SoundView Technology Group.