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  • Some Recent Initial Public Offerings (IPOs) To Watch 0 comments
    Aug 13, 2013 4:11 AM | about stocks: SFM, ONTX, AGIO, RENN

    2. Some Recent Initial Public Offerings (IPOs) to Watch

    Key of Technicals Used In Following Article

     

     

    Bollinger Band

    Bands plotted two standard deviations away from a simple moving average, the closer the price to the upper band, the more overbought the stock is, and the closer the price to the lower band, the more oversold the stock is.

    Moving Average

    Average price over a length of time, it is used to spot trends.

    MFI

    (Money Flow Index)

    Increases when money flowing into a stock (positive money flow) is increases with respect to money flowing out of the stock (negative money flow), an MFI of 100 would mean that there is no money flowing out of a stock and only money flowing into the stock. General consensus says an MFI of 80 is overbought and an MFI of 20 is oversold.

    RSI

    (Relative Strength Index)

    Momentum oscillator that measures the speed of directional price movement, general consensus says an RSI of 70 is overbought and an RSI of 30 is oversold.

    RS = Relative Strength U = Up Days

    EMA = Exponential Moving Average D = Down Days

    n = number of days in period

    Stochastic %K and %D

    An oscillation in closing prices, the %K is the change in closing price with respect to past high and low of a period, usually 14 days. The %D is the average of the %K values for a past period, usually 3 days. A bearish signal is given when %K crosses below the %D in overbought territory, defined as reading above 80. A bullish signal is given when %K crosses above the %D in oversold territory, defined as reading below 20.

    Support/Resistance

    These predetermined levels are used to predict when prices will reverse.

    Symmetric Triangles

    A bullish or bearish technical where the price target is the length of the base of the triangle above or below where the price broke out. For example, if the price broke out above the resistance line formed by the upper leg of the triangle, the price target will be the length of the base above where it broke out.

    W%R (William's%R)

    Change in high price to closing price with respect to past high and low of a period, usually 14 days, a reading above 20 is considered overbought territory, and a reading below 80 is considered oversold territory.

    As the economy slowly heals from the 2008 financial crisis, Initial Public Offerings (IPOs) have picked up speed. Two of the hottest IPOs in the last twelve months were Solarcity (SCTY, $38.34, up $0.43) and Chinese social platform YY (YY, $41.60, down $0.39), which are up 400% and nearly 300% respectively. We will quickly go over each.

     

    We covered Solarcity in our January 13th Weekly Wrap. The installer of solar panels based in San Mateo, California serves thousands of customers in 14 states with 31 operations centers. Customers include homeowners, schools, universities, government agencies, and corporations including eBay (NASDAQ:EBAY), Intel (NASDAQ:INTC), and Walmart (NYSE:WMT).

    The company installs the solar panel system for free, owns the equipment, and maintains it. It makes money by: SolarLease, where the homeowner pays each month, or SolarPPA, where the homeowner pays per kilowatt-hour (kWH). Further, if the homeowner chooses, he can also fully prepay SolarLease so that he does not have any ongoing monthly bills.

    On December 13, 2012, SolarCity issued 11.5 million shares at $8 per share, raising $92 million. It had hoped to sell 10 million shares of its stock at $13 to $15 per share, raising approximately $151 million. On its first trading day, shares rose 47%.

    The leasing and installing business is far safer than selling panels, which undergoes stiff competition from Chinese manufacturers. In 2011, it was the #1 residential solar installer in the United States. It expects to install 60% more panels in 2013 than it did in 2012. We expect solar installations will only increase in the future, especially if solar panel prices continue to fall and we still like the stock. We made 14% for the Weekly Wrap trading the name at the beginning of the year but obviously should have held on for further gains.

    On November 21, 2012, YY issued 7.8 million shares at $10.50 per share, raising $81.9 million. It had hoped to sell its stock at $10.50 to $12.50 per share. It was the first Chinese company to debut shares in the United States since April, after a flood of attacks on Chinese smallcaps in 2010 for using fraudulent accounting practices. At $10.50 a share, YY was priced at nine times earnings for the first nine months at the IPO. So it should be no surprise that shares rose. On its first trading day, shares rose 7.7%.

     

    Headquartered in Guangzhou, China (shown as a red dot on the map), the $2.28 billion online social platform owns YY Client, YY.com, YY Music, and Duowan.com. YY Client, a personal computer software that offers real-time access to user-created online social activity groups, has attracted 400.5 million registered users as of September 30, 2012.

    It features a virtual currency which users can earn through activities such as karaoke or creating tutorial videos, then convert to real cash. Duowan.com originally targeted gamers, by providing information on online games and other resources for users and online game players, but added features to include video streaming and chat features for uses such as concerts, sport, and fashion. Users can buy "virtual roses" for those who post videos. This exchange along with sales of other virtual items and game tokens that users may purchase for use in online activities on YY's platform is how it currently makes money. Thus, YY is more like an online entertainment and education provider with live performers, games, and teachers than like Facebook (NASDAQ:FB).

    Founded in 2005 by CEO Li Xueling, the company had a 84.2% market share of real-time online group voice communication in China in 2011. It remains one of the leaders in the online games market in China, as Duowan.com is the number two game media website in the most populous nation. A fundraiser led by Tiger Global in January 2011 valued the company at $1 billion.

    The company reported 2nd quarter profit on Thursday, August 1st after the bell. Shares jumped in early trading on Friday. Revenue soared 118% from a year ago to $66.7 million, above expectations. Average revenue estimate was $55.63 million. Earnings came in at 35 cents per ADS, up from a slim loss a year earlier, beating by 14 cents. In the current quarter, it said it expects revenue growth of about 90% year over year. Analysts estimate it will earn 21 cents on $62.93 million for the 3rd quarter and 23 cents on $68.03 million for the 4th quarter. Shares ended Friday slightly lower.

    In spite of surging revenue and questionable business practices, the company, like other Chinese smallcaps in the past, has recently come under scrutiny of possible fraud. Analysts still do not know exactly how the business works, and the CFO has refused to tell them. The company had approximately 70.5 million monthly active users on YY in August 2012, but since users do not have to use their real name, numbers could be overstated or fabricated. Further when the SEC asked for the audit work from Deloitte, the Chinese government made a ruling not to allow inspection of the audit work citing national security. Billionaire investor Lei Jun sold over 500,000 shares of YY at $27 per share. While the company could be legitimate, RINO International (OTC:RINO) was another Chinese smallcap that rose over 1000% in the year after its IPO in 2010, but later became nearly worthless as it admitted to fraud.

     

    YY

    RENN

    Market Cap ($billion)

    2.28

    1.43

    Price/Sales

    14.29

    7.89

    Price/Book

    10.17

    1.38

    Trailing PE

    48.66

    --

    Forward PE

    25.18

    --

    PEG

    1.08

    2.63

    Price/Revenue

    11.72

    7.50

    Gross Margin (%)

    50.63

    62.89

    Profit Margin (%)

    18.46

    -33.87

    Operating Margin (%)

    18.05

    -51.74

    Revenue Growth (%)

    117.80

    45.20

    Return on Assets (%)

    9.43

    -5.00

    Return on Equity (%)

    73.24

    -5.66

    Sales Growth (%)

    156.50

    --

    Current Ratio

    3.79

    8.52

    Inst. Ownership (%)

    13.70

    2.50

    Insider Ownership (%)

    39.51

    7.91

    Short Interest (%)

    11.35

    5.72

    Short Change (%)

    33.38

    15.83

    Sour: Numbers calculated from Yahoo Finance

     

    Although Renren (NYSE:RENN) is not an exact fit, it is probably the company's closest publicly traded competitor. The numbers look very good on a growth perspective. But on a value perspective, the stock is overvalued. Price/sales, price/book, and price/revenue are all greater than those of Renren. And a big red flag is that short interest has grown by 30% in the last month. Short sellers seem to think the stock will fall in the near term. And after such a run-up, we would expect some profit-taking.

    At $41, the stock is between its mean target of $40.88 and its high target of $58.00 made by the 4 analysts recorded by Thomson/First Call. Median target is $40.75, and low target is $24.00. Using a scale of 1.0 as a strong buy and 5.0 as a sell, the average rating of the stock was 2.0, unchanged from a week ago.

     

    Current Month

    Last Month

    Two Months Ago

    Three Months Ago

    Strong Buy

    1

    1

    1

    1

    Buy

    3

    2

    2

    1

    Hold

    1

    2

    2

    3

    Underperform

    0

    0

    0

    0

    Sell

    0

    0

    0

    0

    Over the last three weeks, dozens more companies have gone public. Three of them have seen their shares rise significantly. Here are a few we like but need more chart work to develop (and options to trade) before they could become official recommendations.

    Sprouts Farmers Market (NASDAQ:SFM) - 8/1 (IPO price: $18.00, current price: $38.84)

     

    Sprouts Farmers Market (SFM, $38.84, down $0.27) raised $333 million in its IPO by offering 18.5 million shares at a price of $18 per share, above the expected range of $14-$16 per share. Shares more than doubled to end the day at $40.11, the biggest gain for a U.S. initial public offering in more than two years.

     

    The $5.74 billion upscale supermarket based in Phoenix, Arizona operates 160 stores Arizona, California, Colorado, New Mexico, Nevada, Oklahoma, Texas, and Utah. In comparison to other organic food companies, Whole Foods (NASDAQ:WFM) has 355 stores nationwide, and The Fresh Market (NASDAQ:TFM) operates 130 stores in 25 states, primarily in the Southeast, Midwest and Mid-Atlantic United States.

     

     

    (click to enlarge)

     

    The Fresh Market had an IPO on November 4, 2010, selling 13.2 million shares at $22 per share, above the $18-$20 per share estimate, raising $290.4 million. Shares rose 46% in the first day of trading, went up to $42.50 five months later, pulled back to $31 (about where it had closed on the IPO), and made a run to $62.50 before pulling back.

    On the day of its IPO, The Fresh Market had a market cap of $912 million. It operated 100 stores across 20 states. Sprouts has 1.6 times that, and 2012 revenues were about $2 billion. Sprouts expanded from 31 stores at the start of 2009 to a projected 150 by the end of the summer of 2012. Sprouts estimates that it could own up to 1,200 stores over the long haul. Whole Foods targets opening 1,000 total stores. So the company plans to be bigger than Whole Foods, a hard but not impossible feet.

     

    SFM

    TFM

    WFM

    Market Cap ($billion)

    $5.74

    $2.56

    $20.34

    Price/Cash

    56.95

    232.30

    20.57

    Price/Debt

    10.68

    170.67

    753.33

    Trailing PE

    183.39

    38.16

    75.14

    Price/Revenue

    2.88

    1.87

    1.58

    Profit Margin (%)

    1.41

    4.89

    4.22

    Operating Margin (%)

    4.78

    7.76

    6.84

    Earnings Growth (%)

    89.80

    14.80

    21.50

    Revenue Growth (%)

    52.70

    12.90

    12.10

    Return on Equity (%)

    8.34

    36.26

    14.61

    Current Ratio

    1.52

    0.71

    1.80

    Source: Numbers calculated from Yahoo Finance

     

    Comparing with these two companies, it looks like the stock should be about 1/3 less based on price/revenue. But based on earnings and revenue growth, the stock should be priced somewhere between $73.50 and $105. We believe the price will take a similar path as The Fresh Market, meaning it may rise to $50 then pullback to $41 before rising to $73.50 and maybe even $105. But one thing for sure, the organic food sector is hot.

    Onconova Therapeutics (NASDAQ:ONTX) - 7/25 (IPO price: $15.00, current price: $29.40)

     

    Onconova Therapeutics (ONTX, $29.40, up $0.53) raised $78 million in its IPO by offering 5.2 million shares at a price of $15 per share, above the expected range of $12-$14 per share. Shares surged 50% to end the day at $22.53.

     

    The clinical-stage biopharmaceutical company based in Newtown, Pennsylvania develops small molecule drug candidates to treat cancer. As shown in its pipeline below, it has three drugs in development, but one of the drugs is going through four different trials. The trial of Rigosertib intravenous (IV) for higher risk MDS is closest to getting approval.

    Myelodysplastic syndromes (NYSE:MDS) is formerly known as preleukemia and is estimated to cause about 10,000 - 20,000 new cases each year in the United States alone. It is also believed that the number of cases increases with age and that the number of cases for patients over 70 may be as high as 15 per 100,000. The number of new cases of head and neck cancers in the United States was 40,490 in 2006. Pancreas cancer affected an estimated 43,000 people in the United States in 2010. Lymphomas represent about 5.3% of all cancers (excluding simple cell skin cancers) in the United States and 55.6% of all blood cancers. Thus, if all drugs are approved, one can expect at least 90,000 cases each year for the United States alone.

    (click to enlarge)

     

    ONTX

    ARRY

    CELG

    Market Cap ($billion)

    0.486

    0.808

    60.60

    Price/Sales

    9.54

    12.52

    10.32

    Price/Book

    11.94

    --

    11.31

    Price/Debt

    0.00

    8.44

    16.51

    Price/Revenue

    10.32

    12.46

    10.22

    Profit Margin (%)

    -72.08

    -80.70

    26.14

    Operating Margin (%)

    -56.37

    -62.97

    36.41

    Gross Margin (%)

    100.00

    54.76

    94.67

    Revenue Growth (%)

    463.60

    -47.90

    17.00

    Sales Growth (%)

    3006.3

    18.40

    13.70

    Current Ratio

    2.48

    1.74

    2.62

    Source: Numbers calculated from Yahoo Finance

     

    Compared to its two competitors, Array BioPharma (NASDAQ:ARRY) and Celgene (NASDAQ:CELG), it looks like the stock could go higher. The near future could be volatile with a possible NDA (New Drug Application) for FDA approval approaching.

    Agios Pharmaceuticals (NASDAQ:AGIO) - 7/24 (IPO price: $18.00, current price: $30.00, up $0.15)

     

     

    (click to enlarge)

     

     

    Agios Pharmaceuticals (AGIO, $30.00, up $0.15) raised $106 million in its IPO by offering 5.9 million shares at a price of $18 per share, above the expected range of $14-$16 per share. Shares rose 73.8% to end the day at $31.28, making it the best biotech first-day return since Pain Therapeutics (NASDAQ:PTIE) rose 82.3% in its July 2000 debut.

    The biopharmaceutical company based in Cambridge, Massachusetts focuses on the development and commercialization of therapeutics in the field of cancer metabolism and inborn errors of metabolism (IEMs) in the United States. As shown in the pipeline below, it has six ongoing trials and has a collaboration agreement with Celgene .

    Its products include:

    1. AG-221, an oral inhibitor of the mutated isocitrate dehydrogenase (IDH) 2 protein for the treatment of patients with cancers that harbor IDH2 mutations, as well as for the Type II D-2 hydroxyglutaric aciduria treatment
    2. AG-120, an oral inhibitor of the mutated IDH1 protein for the treatment of patients with cancers that harbor IDH1 mutations
    3. Enzyme glutaminase that converts the nutrient glutamine into the metabolite glutamate
    4. AG-348, an oral small molecule activator of PKR enzyme for the treatment of patients with pyruvate kinase deficiency

    (click to enlarge)

    This company seems promising as it has a big financial backer in Celgene.

    There were a half-dozen IPO's last Friday but one that stuck out from last week is Intrexon (XON, $29.09, up $4.36). We are so tempted to buy shares under $30 this week, or at least half positions so look for a Trade Alert if we pull the trigger for a short-term trade while we do more research this week.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Themes: ipo-analysis Stocks: SFM, ONTX, AGIO, RENN
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