By David Sterman
The IPO market has been fairly quiet in 2010, with less than 100 deals coming through the transom. In the boom years, we'd routinely greet 300 or 400 new companies into the public market sphere. In fact, many more companies had hoped to come public this year, but were forced to pull their companies from the starting gate. Bankers don't look to do deals any time there is market uncertainty. And we've had plenty of that this year.
Despite less-than-ideal conditions, a number of new IPOs have turned out to be stellar performers, rising +50%, +100% or even +200% from their offering price. That bodes well for 2011. Assuming the market and economy don't hit another speed bump, many hoped-for IPOs will likely see the light of day in the first half of 2011, and you may want to increase your exposure to this dynamic corner of the market.
It's a widely-held notion that you need to get in on an IPO right away to capture all of the upside. That was the case in the dot-com era, when hot IPOs soared in their debuts. But these days, many new IPOs take time to find their sea legs and only take off well after their debuts. In fact, every single stock in the table below came out of the gate with a whimper and only started rising many weeks or months after their debut.
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So it makes less sense to call your broker to try to get in on a hot IPO and more sense to take a very deep look at them once they are trading.
Euphoria rules the day
Successful IPOs can often end up in the hand of momentum investors that push shares ever higher, far above any sort of reasonable near-term price target. That's what seems to be happening with a number of stocks on this list. For example, Motricity (MOTR) is a solid play on the expanding demand for software used in mobile devices. Back in August, I called this a "beaten-down IPO" and suggested shares may move from a then-traded price of $7.50 up past the $10 mark. But the stock really took off and at $17 looks fully valued by almost any metric.
Momentum investors are treating Motricity as if it is a high-growth stock. Sales are likely to rise a robust +30% in 2011 thanks to recently-signed contracts, but longer-term, sales growth is likely to be far less robust, as Motricity operates in a largely mature market.
In a similar vein, Molycorp (MCP) has more than doubled since its late July debut, thanks to a global trade spat. The company controls the largest untapped reserve of rare earth metals outside of China. And the Chinese government has announced plans to limit exports of these metals, which are used in a range of manufacturing processes.
But investors are overlooking the fact that rare earth deposits exist in many places elsewhere in the world and are simply not being mined right now because China has been a very low-cost producer. China's actions would simply bring those other mines in places like Australia, Mongolia and Latin America back to life. Molycorp is already valued at $2.5 billion even as it is not likely to have revenue before 2012 and 2013, so investors are taking a huge leap of faith in bidding up this stock.
Shares of Qlik Technologies (QLIK) also look like they have overshot any reasonable target price after more than doubling since their June IPO. This maker of business information software looks like a great growth story right now, until you step back and take a broader view.
Sales growth decelerated for each of the three years prior to going public, should slow a bit this year, and then cool even further to +22% next year. This isn't a company that is just getting going -- just one that has become big enough to pull off an IPO. And with shares now trading at 60 times next year's profit forecasts, this stock would stumble badly the first time the company misses quarterly forecasts.
Only a value in the long-term
A number of these stocks share a common theme: they only appear attractive in the context of long-term opportunities. For example, HiSoft Technologies (HSFT) and China Lodging (HTHT) should both benefit from the long-term development of the Chinese IT and travel markets, respectively.
China Lodging in particular looks awfully expensive when measured against near-term results, trading at almost 50 times projected 2011 profits. There are bound to be bumps on the road to Chinese economic growth, which would cause that multiple to severely compress. China Lodging would be a lot more attractive after a quarterly stumble.
After digging through this list of stocks, there is one that stands out as being reasonably valued -- even after a +250% post-IPO gain. Jinko Solar (JKS) has quickly proven itself to be a solid growth story. Back in August, I opined that its stock "which recently traded hands for around $25, could approach $30 in coming months, but most of the sharp gains have been made in this stock as it is no longer a well-kept secret."
On second thought, shares do still look quite cheap, trading at around seven times next year's profit forecasts. A few months ago, that multiple would have been reasonable, but many other solar stocks have soared since then, pushing up the average P/E multiple for the whole solar sector. Jinko Solar now sports one of the lowest P/E ratios in the group.
The remainder of these hot IPOs look primed for a pullback. Some of them will be great short plays once momentum investors exit the stock. Keep an eye on these names, as they are likely to make outsized downward moves in the next market pullback.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.