To pull off a successful initial public offering, bankers need to drum up lots of interest. That's bad news for companies that went public last month.
Many investors and traders tend to take time off in August, and demand for IPOs can be quite weak. Of the 10 IPOs in August, only three are basking in the after-market glow. (MakeMyTrip (NASDAQ: MMYT) has soared, as it is seen as the Priceline.com (Nasdaq: PCLN) of India). The other seven are treading water or are already underwater.
But these laggards may be the beneficiary of "the quiet period game." This game was used to great effect in the 1990s, and has still been somewhat effective in recent years. Here's how it works: Analysts that work at the company's underwriters are refrained from speaking or writing about that banking client for 25 business days. Once that period ends, a flurry of new reports is issued, often times with a bullish tone. So the "quiet period" strategy is to identify which stocks are likely to have their praises sung by analysts. You then buy those stocks before the 25 business day quiet period has ended.
For example, the first five names on the table below are likely to receive new (and possibly bullish) analyst coverage next week.
|Company||Date of IPO||Offer Price||Recent Price||Gain/Loss||Market Cap. ($mill.)||Description|
|Gordmans Stores (Nasdaq: GMAN)||8/5||$11.00||$10.62||-3%||$198||Department Stores|
|Ambow Education (NYSE: AMBO)||8/5||$10.00||$9.30||-7%||$663||Education/Training|
|NXP Semiconductors (Nasdaq: NXPI)||8/6||$14.00||$11.79||-16%||$2,550||Semiconductors|
|IntraLink Holdings (NYSE: IL)||8/6||$13.00||$13.00||0%||$641||Collaborative Software|
|China Kanghui (NYSE: KH)||8/11||$10.25||$12.80||+25%||$279||Medical Devices|
|MediaMind (Nasdaq: MDMD)||8/11||$11.50||$11.95||+4%||$214||Publishing Software|
|MakeMyTrip (Nasdaq: MMYT)||8/12||$14.00||$32.80||+134%||$581||Travel Agency|
|RealPage (Nasdaq: RP)||8/12||$11.00||$16.97||+54%||$1,050||Enterprise Software|
|WhiteStone REIT (NYSE: WSR)||8/26||$12.00||$11.70||-3%||$112||Retail REITs|
This list includes all IPOs from August that are worth at least $100 million. We'll need to await those analysts' reports to get a better sense of sales and profit forecasts, but you can read up on the company's operating history by reading its S-1 filing, which can be found here.
A few of these deals would seem to be less-than-timely, like Gordman's Stores, for example, which operates 68 stores in the Midwest that are a cross between a traditional department store and a discount store. It may be a solid business, but there's so little interest in retail stocks right now that you have to wonder why management didn't wait to pull off this deal until the economy and retail spending improve.
And for some of these deals, the results are even worse than you think. NXP Semiconductor hoped to go public at around $21 a share but had to settle for a $14 price. Shares have now fallen below $12, and analysts are likely to note that they trade at a healthy discount to other chip stocks, even as those rival chip stocks are floating just above lows.
Despite the weak share price performance, NXP, which makes a wide range of chips that go into a host of different applications, is actually faring quite well right now. In mid-August, the company announced that quarterly sales shot up more than +40% (on an apples-to-apples basis) compared to a year ago, thanks to a combination of higher unit volume and firmer prices. That led to robust 40% gross margins and a swing from a loss last year to nearly a $100 million profit this time around. (The company has been unprofitable in recent years.)
But NXP has a few strikes against it. First, being domiciled in the Netherlands will make it hard to stay in close contact with a U.S. shareholder base. Second, as long as investors are gloomy about tech spending, it's unlikely they'll embrace this business model. But shares may get a nice lift when analyst coverage starts to ramp up after Labor Day.
IntraLink Holdings was going to go public, hell or high water. The company tried to go public in 2000 and again in 2005. If it didn't happen in 2010, they'd likely be ill-inclined to wait until 2015. All that time sitting in the IPO waiting room didn't help: This provider of group-based training services has never managed to reach profitability. And with new companies entering the space, it is unclear if the company ever will.
Looking at the underperformers on this list, a pair stand out as potential rebounders.
NuPathe has completed all three phases of clinical testing for its topical patch treatment for migraine headaches. The company hopes to submit an application for approval to the FDA in the fourth quarter, which could boost shares. If approved, sales would likely begin in 2012. It's hard to gauge the market opportunity for this drug right now, so keep an eye out for analyst reports (and possibly bullish ratings -- especially with the stock down -20% since the IPO) sometime next week.
China Kanghui also may hold some real appeal. The company is a leading supplier of orthopedic surgical devices in China, which is a vastly under-penetrated market in terms of health care spending and also has a rapidly aging population that will increasingly require orthopedic help. Morgan Stanley and Piper Jaffray served as the firm's underwriters and could issue bullish initial reports around the second week of September.
The charm of all of these IPOs is that they had to aggressively cut their IPO prices to get their deals done (except for MakeMyTrip and RealPage), so they are likely to appear cheap compared to other publicly-traded rivals -- a key point that will surely be noted in the upcoming waves of earnings reports.
Further research on NuPathe and China Kanghui is warranted, as they possess intriguing growth opportunities.