by David Sterman
The initial public offering (IPO) market continues to heat up with deals coming this week for GM (NYSE: GM), Booz Allen (NYSE: BAH), Caesars Entertainment (NYSE: CZR) and a half dozen other firms. The flurry of deals puts us on track for the most robust quarter for IPOs in more than two years. And looking at the pipeline of new deal registrations, the first quarter of 2011 may be even hotter.
I recently looked at a strategy that uses analyst research to find stocks about to pop.
Yet that's not the only way to look for upside among recent new deals. You can also scan lists for "broken IPOs," which are firms that have been public for a short while and are drifting lower while investors focus on more established companies.
Last month, I took a look at top-performing IPOs, as I wrote back then, "many new IPOs take time to find their sea legs and only take off well after their debuts. In fact, every single stock [mentioned in that piece] came out of the gate with a whimper and only started rising many weeks or months after their debut."
The stocks in the table below are all broken IPOs, each is trading off at least -15% from its IPO offering price. I've pored through the list and found the best rebound candidate.
Complete Genomics (Nasdaq: GNOM)
Any company that struggles to fetch a desired IPO price is a conundrum for investors. On the one hand, a lower-than-expected price is a sign that investor demand just isn't there. On the other hand, you've got a chance to buy a stock at a cheaper price than investment bankers have recently assessed. Case in point, Complete Genomics, which hoped to sell shares for $12 to $14, had to settle for a $9 offering price last Friday, and the stock is now down to $7. That's just half the high end of the expected range of pricing. The weak demand may be due to the fact that rival Pacific Biosciences (Nasdaq: PACB) had just pulled off an IPO weeks earlier, snatching the attention of any fund managers that buy these kinds of companies.
Complete Genomics is involved in DNA sequencing. While other firms like Illumina (Nasdaq: ILMN) and Pacific Biosciences sell equipment to scientists, Complete Genomics acts as a service bureau, performing third-party DNA sequencing services.
Why the tepid IPO reception? Complete Genomics is just starting to generate sales and investors fear that quarterly losses will continue for the next year or two, setting the stage for another round of capital-raising. Ideally, the company would have waited until sales started building and losses started shrinking, but its backers likely balked at putting any more money into the company.
Yet this stock has all the makings of an IPO rebounder, as the firm's underwriters, led by Jefferies, get set to publish initial reports on the company in early December. You can expect to see bullish forecasts of projected sales growth rates, and if you look out far enough, fast-rising profits.
Analysts are likely to note that Complete Genomics' DNA sequencing approach may prove to be very cost-effective and capable of high market share. Industry leader Illumina can analyze an entire sequence of DNA strands for around $10,000 in materials. Complete Genomics thinks it can do it for just $4,500. And over time, prices could drop well below that level, making DNA sequencing for the masses more feasible.
Keep an eye on new IPOs. They often stumble out of the gate, giving the false impression that they are unworthy investment candidates. Of the recent crop of IPO laggards, Complete Genomics appears to have the greatest potential upside.
With a broken IPO and scant revenues, investors will need to focus on the company's technology value. Complete Genomics is valued at less than $150 million, roughly $20 million less than the money spent developing its technology platform. The revenue profile tells you that this is a risky biotech stock. But if the company can make headway in the space, investors may start to make comparisons to Illumina, which is valued at $7.2 billion -- 50 times more than Complete Genomics.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.