Initial public offerings still have a bad reputation with many investors.
There are some reasons for cynicism. After all, a number of companies with poor business fundamentals or weak management have been foisted on the investing public, particularly during stock market booms. Some, like the now-infamous online pets supplies retailer Pets.com, suffered from weak business fundamentals and ended up in bankruptcy less than one year after going public.
Other investors believe that the only way to make money from a newly listed company is to be a hedge fund or large private investor with enough clout to secure shares as part of the offering process and flip those shares into the opening day hype.
But it's a huge mistake to ignore the IPO market--some of the past decade's best-performing stocks have been relatively new to the public exchanges. For example, I read countless articles about how overvalued online search giant Google (GOOG) was when it first came public in August 2004; the offering priced at $85 per share, the low end of its expected range. But, if you purchased the stock on the close of its first day of trading, you'd be up more than 460 percent today.
A more obscure example: the IPO of Chesapeake Midstream Partners LP (CHKM) I covered in an October 27, 2010, article on Seeking Alpha, "The Enormous Potential of the Much Awaited Chesapeake Midstream Partners LP IPO." Investors didn't recognize the full yield and distribution growth potential of this Master Limited Partnership until it reported a few quarterly results and some of the larger brokers picked up research coverage, sending the stock higher.
I always keep a close eye on the IPO calendar and read through dozens of IPO registrations filed with the SEC each month looking for potential trading and investing opportunities. While it's important to stay on top of the largest and highest profile IPOs like the upcoming listing of Facebook, many of the most profitable opportunities are smaller, under-the-radar firms that come public to little fanfare. Sometimes you can pick up these smaller names at attractive prices before investors are fully aware of their growth or yield potential.
Last month, in my January 13 article on Seeking Alpha, "7 Stocks On My Watchlist," I profiled two new IPOs--Imperva (IMPV) and Laredo Petroleum (LPI)--I am watching as potential trade recommendations in my Cocktail Stocks service. Here's a look at four recent IPOs that make my watchlist for this month's recommendation.
Greenway Medical Technologies (GWAY) is a small capitalization provider of healthcare information technology products and services aimed primarily at the ambulatory healthcare provider market such as individual physician practices, clinics and university healthcare offices.
Greenway's products address two primary markets: electronic healthcare records and practice management. One of the problems facing healthcare providers is that many patients' clinical records are still maintained on paper charts and records. This can lead to treatment errors in cases where providers fail to spot potentially harmful drug interactions or diagnosis errors if a provider doesn't have access to a particular patient's entire medical history.
With electronic healthcare records, a patient's medical records are stored electronically and can then be accessed by any healthcare provider from any mobile or fixed device. The list might include data accessed from an ambulance during an emergency or information collected during family doctor visits accessed by a specialist during treatment.
Practice management software involves the automation of day-to-day administration functions such as patient billing, filing for reimbursement from the government or private health insurance providers and online visit scheduling. While these might seem rather mundane tasks, individual practices can save considerable sums through automation and it can streamline and accelerate the practice of filing for and receiving reimbursements from insurers and programs like Medicare.
Greenway's PrimeSUITE product essentially integrates practice management and electronic healthcare records functionality into a single software product. The package also contains some other value-added functionality such as allowing patients to request web consultations with their doctor to ask questions without having to tie up valuable office time.
Greenway just went public on February 1, 2012, so it has a limited trading history and has not yet reported quarterly results. The initial offering of shares was downsized and priced at $10, below its expected range of $11 to $13 per share. But the stock is up well over 40 percent from where it opened for its first day of trading on secondary markets and is up about 48 percent from its offering price, so it has attracted some fans since coming public. In addition, the "quiet period" following the initial public offering expires on March 12, 2012 -- during this period, underwriters of this deal including J.P. Morgan and Morgan Stanley can't issue research reports. After the quiet period ends, expect to see Greenway Medical Technologies garner more attention.
Fundamentally, this is an attractive story. Over time, it's likely that electronic health records will supplant paper charts due to a number of driving forces including the potential to save money, mandates from the government to pursue electronic filings for reimbursement, a push by individual insurers to use electronic records and consumers' desire to manage their records and bills online.
Larger hospital systems were the first to start making the switch, but the market for electronic healthcare records targeting smaller practices and clinics is underpenetrated. PrimeSUITE appears to have an attractive market position in this underserved niche with a 95 percent customer retention rate and near 50 percent year-over-year revenue growth in the most recent quarter.
The big player in healthcare information technology, Cerner (CERN), also recently reported strong quarterly results and bookings trends with the stock gapping higher on the news. That bodes well for underlying demand in Greenway's core market.
JIVE Software (JIVE) provides a social networking software platform for business, similar to what Facebook (FB) and Google+ provide for the consumer. The platform allows people within an organization to collaborate on projects or communicate between departments and ask questions. In addition, the software can be expanded to allow communication with customers, strategic external partners and suppliers.
The idea behind Jive is that most consumers are familiar with and use social networks like Twitter, LinkedIn (LNKD) and Facebook, but within enterprises most collaboration is still done via formal in-person meetings and teleconferences or e-mail chains. None of these traditional methods are ideal solutions; in-person meetings can be a waste of time for some participants while e-mail chains often get lost in the clutter of messages in an individual's inbox. It's likely that over time people will want to collaborate within businesses in the same way they do personally on social networks.
In addition, increasingly consumers want to engage with firms, ask questions or register complaints on social media. Companies can use Jive's software to help monitor social media and connect individuals within the company to consumer-oriented social platforms like Facebook and Twitter.
Jive is operating in a cutting edge market segment, and that's always a risky proposition. The company went public on December 12, 2011, and has a limited operating history; it's also in an early stage of growth and is likely to continue losing money for some time. That said, social media is likely to be one of the hottest segments within technology in early 2012 as we approach the planned IPO of Facebook and Jive has carved out a unique niche within the segment by focusing on the enterprise rather than just the consumer.
Jive's technology has already been adopted by a number of larger companies. In the company's first quarterly earnings release as a public firm management revealed that it had signed some 40 new customers in the fourth quarter alone including PriceWaterhouseCoopers, Thompson Reuters and Ace Limited. Contract renewals are over 90 percent for contracts over $50,000 in value and over 110 percent if you include the fact that Jive has been successful in upselling many customers. In many cases, companies start testing Jive within a single department or unit of the business and then roll it out more widely or as part of a broader customer service solution as time passes.
The main competitors for Jive are big companies like IBM (IBM), Microsoft (MSFT) and Salesforce.com (CRM) that may provide some software functionality that's similar to Jive's platform. But, in its quarterly conference call, management pointed out that many of its recent big contract wins are from companies that already use software offerings from these big players - Jive appears to be offering a differentiated solution.
There's no doubt this is an expensive stock, trading at around 9 to 10 times expected 2012 revenues of $108 to $112 million. But, revenues are likely to continue growing at more than 40 percent annualized in the near term, and that valuation isn't out of line with other social network plays like LinkedIn.
Bonanza Creek Energy (BCEI) is an oil and gas exploration and production (E&P) company with three main operating areas: the Mid-Continent, Rocky Mountains and California. Roughly 70 percent of reserves and production consist of crude oil and natural gas liquids rather than natural gas. The firm's liquids focus is a huge advantage in the current environment because crude oil prices are healthy at above $100 per barrel while natural gas trades near decade lows well under $3 per million BTUs.
The biggest operating region for Bonanza is the Mid-Continent, where it primarily targets the Cotton Valley sands of southern Arkansas. In total this region accounts for about 70 percent of reserves and a little over half of total production. For the most part, wells in this region are simple and low risk for Bonanza because they're primarily infill drilling locations where the company is drilling a new well in between existing producers. The geology of the Cotton Valley sands is well known and the region has been in production for years. The firm plans to drill 38 wells with two rigs operating in this area in 2012.
However, the real upside for Bonanza comes from its properties in the Rocky Mountains area, where it has nearly 63,000 net acres. The Niobrara Shale of Colorado is emerging as one of the hottest unconventional oil plays in the US and several large operators including EOG Resources (EOG), Noble Energy (NE) and Anadarko Petroleum (APC) are active in the region. While producers have been drilling simple vertical wells in this part of Colorado for years, the Niobrara Shale is proving even more prolific when produced using a combination of horizontal wells and hydraulic fracturing techniques similar to those employed in places like the Bakken Shale of North Dakota and Marcellus Shale of Appalachia.
Bonanza Creek has reported results on four horizontal Niobrara Shale wells on its acreage to date. The average 30-day production rate for these wells is 458 barrels of oil equivalent per day (boe/day) with about 72 percent of that output in the form of crude oil, in line with what other producers in the region have been reporting. The company plans to spend 39 percent of its $250 million 2012 drilling budget on horizontal wells in the Niobrara and another 29 percent on vertical wells in the region. That should be enough to complete roughly 24 horizontal wells and 92 vertical wells in the Rockies region his year.
All told, Bonanza Creek is forecasting more than 100 percent total production growth in 2012 to as high as 10,000 boe/day by year-end up from less than 5,000 boe/day as of the end of 2011. The stock recently hit a new 52-week high and is starting to generate some additional attention and trading volume, but I can see further upside as it reports additional well results and proves the value of its Niobrara acreage.
Sanchez Energy (SN) is an oil and natural gas exploration and production company focused on the Eagle Ford Shale field of southern Texas. Like Bonanza Creek, the company went public in mid-December, attracting little attention from investors and managing to sell just 10 million shares at $22 each, well under its planned range of $24 to $26 per share. Since then, however, the stock has attracted more attention and now trades more than 30 percent above the close on its first day of trading.
The Eagle Ford Shale play is an unconventional play with three distinct windows: an oil window in the north, a dry gas window in the south and a natural gas liquids rich window in the middle. Dry gas is simply natural gas that has little or no natural gas liquids content; as you might expect, with natural gas prices so low, the dry gas portion of the Eagle Ford is seeing little development. In contrast, producers are pouring capital into developing the oil and NGLs-rich sections of the field, which is exactly the region where Sanchez's acreage is concentrated. The company has good company as major producers like Chesapeake Energy (CHK) and EOG Resources are active in this region.
The company plans to spend between $136 and $154 million developing its Eagle Ford acreage in 2012 and expects to drill a total of 16.5 net wells this year. Sanchez's production at the end of 2011 was just 1,350 boe/day with more than 80 percent of that output in the form of oil. By the end of 2012, the company expects to roughly triple its output to between 4,000 and 5,000 boe/day, a growth rate that appears achievable based on production results from the company's first 9 Eagle Ford wells.
Looking a bit further in the future, the company has leased over 80,000 acres in Montana in an area that might be perspective for the Bakken and Three Forks oil plays. These acres appear to be located outside the fairway of the Bakken Shale play and Sanchez is likely to wait for other producers to announce some well results in this area before it decides to invest significant capital.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.