By Michael Cintolo, Chief Analyst, Cabot Market Letter
New Issues = New Leadership.
OK, OK… it's not as simple as that, but that thought is why we're constantly monitoring the new-issue market, searching for companies that could morph into new leaders a month or two or six down the road. For years, many IPOs were stodgy, income-oriented names (pipelines and such), but since 2013 there has been a resurgence of true growth companies with exciting stories. Even better: The nascent market rally is seeing many of these recent issues go to the moon!
The downside, as with many recent IPOs, is liquidity and valuation - many of these stocks trade next-to-nothing volume-wise, which means they're unlikely to garner much institutional support, and some are already trading at 20, 30 or more times sales. Still, the growth shown by some of these firms is outstanding, and our bet is that a few of them will go on to be winners.
Frankly, there's not enough space to cover all the new issues we're following, but here are five of our favorites (in alphabetical order):
GasLog Partners (NYSE:GLOP) is a subsidiary of sorts of GasLog (NYSE:GLOG), and it's not our typical stock. GLOP is actually a partnership that will pay out all of its income (derived from operating LNG ships) in dividends. But there's a compelling growth story here, too. In a nutshell, GLOP, which currently has three LNG ocean carriers under five-plus-year contracts, has a right to purchase another dozen from its parent GLOG in the years ahead. With the future of LNG shipping looking very bright, and with long-term contracts common in the industry, there should be years of solid earnings and dividend growth. The stock is very thin and won't be a barn burner, but it's off to a good start.
GrubHub (NYSE:GRUB) has the leading platform for allowing consumers to directly order takeout or pickup from 29,000 restaurants in the U.S. and Britain. There is competition here - Yelp's new online ordering platform sounds similar - but GrubHub is the leader. In the first quarter, the firm had 3.85 million active diners that collectively processed $433 million in gross food sales, just a fraction of the $67 billion spent on takeout every year in the U.S. The stock has formed a very constructive first-stage base, and it's been pushing persistently higher since the market low.
JD.com (NASDAQ:JD) may eventually be second fiddle (stock-wise) to Alibaba (which is likely coming public in August), but it's no slouch - the company is the largest direct-sales firm in China, with a market share near 50% and revenues north of $12 billion. That said, there are no profits yet (almost like Amazon, etc.), though revenues grew 72% last year. The stock has been hot since coming public on May 22.
Rice Energy (NYSE:RICE) is another name we've mentioned before; it's one of the many shale exploration firms that's doing great. While we like many of them, Rice looks to have a unique story - its acreage in the Marcellus and Utica shales is extremely lucrative, and the firm has some proprietary know-how in placing the laterals in its wells, leading to much higher output. Despite producing solely natural gas, the company's wells pay back their drilling cost in about a year, with net returns averaging north of 100%! The stock is expensive ($4.2 billion market cap vs. an estimated $470 million in revenue this year), but profit margins should be huge, and Rice has tapped just a small fraction of its well locations. The stock has advanced steadily since breaking out in mid-March.
Shares of Zoes Kitchen (NYSE:ZOES) are very thinly traded, but we feel it could easily "grow up" in the months ahead. The company's fast-casual concept features fresh Mediterranean dishes, and the potential here is huge - the firm's current crop of 120 restaurants are performing great (same-store sales were up 5.7% in the first quarter), and new store openings are progressing at a breakneck clip (it's aiming to open 30 restaurants this year, a 27% jump in its store count!). The long-term potential could be upward of 1,600 stores! The stock has set up a beautiful IPO base and nosed out to new highs earlier this week.
A word of caution: you must handle IPOs with care; if the market has a hiccup, some of these names could easily take sharp hits. But starting out with a small (half-sized or less) position or two in these names, with the idea of adding a few shares if the stocks start to move higher, could pay off nicely.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.