by David Sterman
Imagine showing up to a party and find you're the only one in the room. This is the lonely feeling many companies experience when they complete their initial public offering (IPO). These companies spend a great amount of energy preparing for their debut, only to find little investor interest once they go public. When their stock drops like a stone after the IPO party, depression can set in. But for some of these companies, it's only a matter of time before their stocks regain strength.
For example, FriendFinder Networks Inc. (NYSE: FFN) rose a hefty 12% on Friday, July 7, perhaps on word the company had resolved a major lawsuit the day before. FriendFinder -- which operates dating websites, adult-oriented media properties and religion-oriented sites -- looked like it was ready to bust out after picking up fresh analyst coverage on June 22, when it rose 7%. This pop was the "quiet period" pop that I wrote about in this article. Even with a pair of sharp one-day moves, shares still trade for less than half their May 11 offering price of $10.
In the table below, there are a few IPO wallflowers that may still get asked to dance. Their shares may lag now, but could move higher in coming months.
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From this list, I've found three recent IPOs in particular that have already started to show signs of improvement, making them potentially profitable value plays. Here they are...
1. Boingo Wireless (Nasdaq: WIFI)
At first glance, this business model held little appeal to me. The provider of Wi-Fi "hot-spots" at more than 300,000 locations would seem to be doomed by the advent of all-you-can-eat data plans from wireless service providers.
But recent news that Verizon (NYSE: VZ) wants to cap its users' data usage -- a move likely be copied by rivals -- puts Boingo back in play. You could now argue that consumers will be better off subscribing to Boingo's plans in places such as airports to avoid racking up the dreaded overage charges on their wireless bills. This may explain why shares have moved up 20% since bottoming out a month ago.
Despite the upward move, this is still a very cheap stock, trading at around six times projected 2011 earnings before interest, taxes, depreciation and amortization (EBITDA). The charm of this business model is that management can ratchet spending up or down according to need and cash flow. If demand is strong, then look for many more hot-spots to be added. If demand cools, then look for the company to hold off expanding, and instead squeeze more cash flow out of each existing hot-spot. Shares, recently trading at $9.50, could move up into the mid-teens according to analysts who recently initiated coverage.
2. RenRen (Nasdaq: RENN)
After bottoming out one day after I said it was "finally a bargain" on June 23, shares of this Chinese social networking site have risen for eight straight sessions until the market headed south on Friday, July 8. All told, the stock moved up 68% in just two weeks. The move comes as investors pour back into Chinese social media stocks -- Baidu.com (Nasdaq: BIDU), Sina.com (Nasdaq: SINA) and Sohu.com (Nasdaq: SOHU) have all rebounded in recent weeks as well.
The rotation back into RenRen and its peers has a reason. Concerns have risen that the Chinese economy may be cooling. The banking sector is dealing with a rising tide of possibly delinquent construction loans and inflation is becoming more troublesome. However, any economic slowdown would leave these consumer-facing web-based business models largely unscathed, as long as Internet consumption and advertising trends continue to build.
As I noted a few weeks ago, RenRen is boosting sales at a fast clip. Although shares aren't cheap based on traditional metrics, investors are angling for a position with these potentially high-growth business models. I continue to think this is a name to own, though you should know it can be volatile, as evidenced by the initial swoon and subsequent sharp rebound. This stock is definitely a play for the long-term, not the short-term.
3. NeoPhotonics Corp. (Nasdaq: NPTN)
I have some pity for the folks that bought into this February 2011 IPO, soon after it came public. Shares quickly soared from the low teens up to $20 and stayed aloft until the earthquake in Japan. The crisis made it quickly apparent that this maker of photon-based semiconductors would take a deep hit to sales and profits. Five months later, shares trade below $8.
It doesn't help that NeoPhotonics operates in the optical networking space. This whole sector has been crushed this year by key telecom service providers, which are slowing down orders to reduce inventory. Even the firm's underwriter, Merrill Lynch, concedes the business model is not especially timely, noting that NeoPhotonics may suffer a hiccup as China's Huawei-- which represents more than 50% of sales-- may need to put the brakes on to reduce inventory of NeoPhotonics' chips as well.
Merrill launched coverage of NeoPhotonics back in March with a $12 price target, just as shares were starting to drift down through the mid-teens. This price target was recently lowered to $11, which is still 45% above the current price.
Right now, this is a value play until growth eventually returns. The company is sitting on nearly $100 million in cash, accounting for about half its market value. The stock has traded down to tangible book value, which has likely put a floor in place. Shares trade for about one times projected 2012 sales, which is half the average multiple seen by optical networking stocks in the past 10 years.
These newly-public companies have seen their initial investors exit. Too bad, because as new investors arrive to form a shareholder base, look for support to build and shares to rise. As a result, you may want to consider taking a position in at least one of these names. These shares, which currently trade below their offering price, may move back into the black in the quarters to come.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.