I rarely participate in IPOs. I have found that any offering that the average investor can get access to is not worth investing in at the offering price, the best recent example being the Facebook (FB) debacle. I also do not like investing in something that insiders are selling, and the financial data on IPOs tends to be limited. However, that said, IPO investing has been an extremely lucrative strategy for me over the years. The secret is to revisit IPOs six to 12 months after their initial offering date, after the insiders' lockup period has expired and the company has had a few quarters to season.
Some of my best performers have been busted IPOs selling much lower than their offering price. For some reason, investors tend to want to invest in these offerings when they are selling at $15 to $20 a share on their debut but avoid the same equities when they are selling at $5 to $10 a share a year later. A stock I profiled Tuesday, Zeltiq Aesthetics (ZLTQ), meets that criteria and is up over 10% since the story ran earlier in the week. Another IPO I like that came public six months ago and is down less drastically (around 20%), but has substantial upside, is Matador Resources (MTDR).
According to the business description from Yahoo Finance, "Matador Resources is an independent energy company that engages in the acquisition, exploration, development, and production of oil and natural gas resources in the United States."
Here are seven reasons why Matador has long-term value for investors at $10 a share:
- Insiders have purchased over 200,000 net shares so far in 2012.
- After falling some 20% since the IPO in February, the stock is cheap at just 6 times forward earnings.
- Revenues are exploding at Matador. The company had more realized revenues in Q1 2012 than all of FY 2009. Analysts expect over an 60% sales increase in FY 2013 as well.
- The company is tilting more and more of its capital budget toward oil, primarily in the Eagle Ford region, where 84% of its FY 2012 capital budget is allocated. This resulted in a fivefold increase in oil production in FY 2011 and the company has projected a tenfold increase in oil production in FY 2012 over FY 2011.
- The majority of both oil and natural gas production is hedged for both FY 2012 and FY 2013.
- The seven analysts who cover the stock have a $15 median price target on Matador.
- The company carries little debt, increased cash flow around 140% from FY 2010 to FY 2011, and earnings are expected to come in at approximately $1 a share in FY 2012 and $1.65 a share in FY 2013.