By David Sterman
When shares of recent initial public offering Boingo Wireless (WIFI) surged more than 20% on June 13, investors shouldn't have been so surprised. After all, that was the day analysts were allowed to comment on the stock -- the end of the 25-day "quiet period" following an IPO.
Roughly a month earlier -- on May 4, to be exact -- those analysts' counterparts, the company's underwriters, pitched lofty promises to get clients to buy into the deal. Now with the end of the quiet period, analysts were just reiterating the company line fed to them a month ago. In the case of Boingo Wireless, such chatter was bound to help the stock. It had fallen more than 30% since its early May debut.
I discussed this investing approach in details last fall, which you can read about here. Because the IPO market showed great strength in May, June is bound to have its share of quiet period plays. In a nutshell, a quiet period play is a small window of opportunity to buy stocks at a good price just before analysts are allowed to comment on them, which usually gives these recent IPOs a fresh bounce.
Here are a few IPOs whose quiet period is about to end soon.
[Click to enlarge]
A trade, not an investment
When looking at these post-IPO plays, it's important not to overthink them. Don't deeply analyze the fundamentals; instead, simply focus on what analysts might say and do. There's a very good chance analysts will soon have target prices on the stocks that are in line or above the price set by the investment bankers at the time of the offering.
This means any stock that has drifted lower from the offering price is likely to show the most solid upside, as was the case with Boingo Wireless. Of course, a very bright outlook trumps all, so a stock such as Solazyme (SZYM), which is up nicely from its May 27 debut, could still power higher. My colleague Andy Obermuller, editor of Game-Changing Stocks, remains quite bullish on the biofuel sector and thinks Solazyme is a name to watch.
A bump up before another drop?
In late May, I cautioned that LinkedIn (LNKD) looked to be one of the most overvalued stocks in the market. Shares have fallen about $10 since then, and they could fall even further as investors come to see the hot stock is cooling off. A thin float begets wild upward moves, as we saw, but can also exacerbate selling pressure. Before this happens, though, look for LinkedIn to post a solid temporary rebound in the week of June 20, when analysts start to issue fresh, bullish reports. Morgan Stanley and Bank of America's Merrill Lynch unit are most likely to weigh in, as their firm took lead roles in the recent offering.
The Russian Google (GOOG)
I'm quite intrigued by Yandex (YNDX), which operates the leading search engine in Russia with a 65% market share. Shares briefly spiked above $40 in their first day of trading on May 24, though they are now back down below $32 -- roughly 10% below the opening price of $35.
The company has a very appealing long-term outlook. The Russian Internet market is still growing (only 40% of consumers currently have Internet access), and online ad rates are quite cheap and bound to rise as the Internet becomes more ubiquitous in the country. To be sure, the stock looks pricey at around 20 times trailing sales, but the coming wave of analysts' reports should focus on the long-term growth potential and perhaps post lofty price targets.
The broken IPO
What to make of FriendFinder (FFN), an operator of dating websites, adult-oriented media properties and religion-oriented sites? The company's stock traded very poorly in its May 11 debut, but shares have been falling ever since and are now down more than 50% from the offering price of $10 in less than a month.
FriendFinder's shares started to rebound after the company released fairly impressive (albeit abbreviated) quarterly financial results on June 2, but sellers took hold anew in subsequent sessions. They may be focusing on the fact that FreindFinder carries $500 million in debt but only raised $50 million in its IPO. Presumably, management hoped to pull off a bigger deal to be able to pay down debt more aggressively and found that the company's bankers simply couldn't line up enough interest for the IPO.
Despite the high debt load that will weigh on the stock in the long-term, shares may get a fresh solid bounce from the analysts' reports, which are slated to be released later this month. Simply issuing price targets at the $10 offering price yields 100% upside.
The IPO market has cooled in June as the market swoons, which means these post-IPO trades won't be as abundant in July. Right now is therefore a great time to play the "quiet period bounce" strategy and potentially profit from these undervalued stocks.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.