After a strong market in September, IPO activity picked up sharply in October. In the first two weeks of the month there were 11 deals priced and 11 new filings. At present there are about 15 deals in the market for pricing in the next two weeks.
In the last Candygram we pointed out that the appetite for China-based companies picked up substantially from where it was this summer. That trend has continued, most notably with the dramatic after-market performance of ChinaCache (CCIH), which can be loosely described as “the Akamai of China,” to which most investors replied “say no more!”
The IPO market feels like it has broadened and deepened in the last two weeks. For example, some very meat-and-potatoes companies like Tower International (TOWR) (metal stamping), Body Central (BODY) (women’s apparel) and Ellington Financial (EFC) (specialty finance) have been priced. Even “blank check” offerings like Hicks Acquisition (HKAC.U) and Cazador Acquisition (CAZA.U) made it out the door.
The September strength has been sustained so far this month with an average gain of 4% over the last two weeks for the stocks in our IPO Candy ecosystem. We never would have guessed that Motricity (MOTR) would again lead the performance group with a two week gain of 31%. The stock actually reached $20 before settling back to $17. Our IV is only $11 and the average price target from the banking analysts is $12. We’ve been taking profits on Motricity in IPO Candy Folio during the rally. Unless a review of the fundamentals changes our thinking, we will continue to reduce our weighting. The only thing we have picked up that could change our thinking is the size and opportunity of international markets where operators may be more open to sharing the wealth with infrastructure providers. This is an untested thesis for now.
Elsewhere, Envestnet (ENV) finally made a move and was up 25% in the last two weeks. This provider of online investment tools and services for independent financial advisors (a growing market) had a weak IPO on July 29th and then saw little follow-on interest in August and September. But when investors had another look at the company in October as they hit the road again to make presentation, they found a more receptive audience. (There’s a lesson here for companies that end up pricing in a weak market – block out some time to go out again in a few months to meet with new potential investors.)
One of our long-time favorites, Ancestry.com (ACOM), continued to perform well, adding another 4% to be up 18% in the last month and 37% in the last three months. The shares are just below $25 and nearing our IV of $28. The company did make an acquisition so we will review our IV estimate in Q4.
Turning to look at the major decliners, we did see a pattern. The two worst performers - Meru Networks (MERU) and MaxLinear (MXL) – both had their share lockups come off in late September. Although we have been questioning whether this effect was still a factor in the modern market, these results suggest that paying attention to lockup period expiration remains important.
IPO CANDY FOLIO UPDATE
The IPO Candy Folio is up by approximately 8% in the last month. Our goal is long-term performance, and we review and adjust the portfolio as needed every two weeks. We made the following changes today:
- Initiated a 3% position in MDMD based our research conclusions and IV analysis.
- Increased QNST from 4% to 5% based on appreciation potential.
- Reduced ACOM from 8% to 7% based on recent appreciation.
- Reduced CBOE from 6% to 5% based on recent appreciation.
- Our cash allocation decreased from 10% to 9% of assets.
FILINGS & THE PIPELINE
Again, China deals dominate the calendar and many of those are outside our areas of interest (greenhouses, energy recovery, animal nutrition, apparel) but there are a few, including EverBank and RigNet, that may be included in the ecosystem.
Of the deals currently on the road we are watching NetSpend, Pacific Biosciences (PACB) and First Wind (WIND) carefully and doing work on them. Both Bravo Brio (BBRG) and Oragenics (ONI) are intriguing and may prompt a blog post, but are unlikely to receive ongoing research and analysis coverage from us.
COVERAGE & THE CALENDAR
We added MediaMind, on online advertising technology company, to our list of active coverage with an IV of $25 which compares well to the current stock price of $14.
There were no new initiations of coverage in the last two weeks from the banks. However,SouFun, a China-based real estate portal, is due for banking coverage on October 27th. The shares are up 51% from their IPO price so analysts may struggle to justify a higher price target.
There are a bunch of lockups coming off in October with the first cluster on the 18th. These names include Alpha & Omega (AOSL), Convio (CNVO), Codexis (CDXS), Dynavox (DVOX), Global Geophysical (GGS), SPS Commerce (SPSC). We will be watching SPS Commerce closely because it’s a name we like and if it declines in price around the lockup end it would be an opportunity. The shares are just above $13 and our IV is $16.