IPO Week in Review: Few Deals Proved Enticing

by: Bill Simpson

The week of 4/19, with eight deals pricing, was the busiest ipo week since the fall of 2007. It was a very average group overall and the pricing and initial aftermarket performance reinforced that case.

Ipo fallacy: 'It is all about the initial pop and the only way to make money is getting the deal and flipping on open.' Wrong, wrong wrong. Yes, that was the case a decade ago, when the market was frothy and an ipo pricing at $13 routinely would open at $55. Quick fact: The initial ipo 'pop' from pricing since 1/1/09: 5 1/2%. The average gain (based on Friday's close) for ipos since 1/1/09: 13%. Most of the gains have been made in the aftermarket as was the case during the last bull run of 2003-2006. The first day is really not all that important, the key to making money over time with ipos is to find a deal that is overlooked and has the potential to appreciate over time.

A quick look at this week's deals with my thoughts:

Excel Trust (NYSE:EXL) - Priced 15 million shares at $14. Opened pretty much broken and closed down 5% at $13.30. EXL is a REIT focused on acquiring and owning retail community centers (strip malls essentially). Plan is to leverage up on mortgage debt to increase return to shareholders. Management has a solid track record, key here is whether one believes commercial real estate has bottomed. Minimal operations to date; this is one to look at down the line after a year or so to see how things are progressing. No interest in this deal.

Alimera Sciences (NASDAQ:ALIM) - Priced 6.6 million shares at $11. Closed Friday at $11.01, flat from pricing. ALIM is a development stage pharmaceutical focused on retina disease. Expected to have first candidate commercialized in early 2011. Question marks here include acceptance of their product as well as size of end market here. No interest in this deal either.

Codexis (NASDAQ:CDXS) - Priced 6 million shares at $13. Closed Friday at 14.04 for an 8% gain from pricing. Biocatalysts for biofuel and pharma. Large collaboration with Shell (NYSE:RDS.A) to develop biofuels. Not close to commercialization in biofuel segment, working initially as a 'green' and 'clean' fuel ipo. Highly speculative, will either be a home run or a below $5 stock in 2-3 years. I'd put odds on the latter, still too early to jump in here. No interest, although if CDXS/Shell are successful this has 'home run' potential.

Dynavox (DVOX) - Priced 9.4 million shares at $15. Closed Friday at $15.18, a 1.2% increase over pricing. DVOX is the dominant market leader in assisted speech technology and devices. Makes products that speak for those that cannot. Profitable since at least 2005, strong gross (75%) and operating margins (25%), should book a 35%+ revenue gain in FY '10 and earn $.63. I like this one a lot and believe it got lost in the shuffle of 'average' deals this week. The only ipo of the week I am currently long, this one has the potential to be a long term winner if they continue to execute. I see DVOX and Financial Engines (NASDAQ:FNGN) as the two top deals of 2010 as far as appreciation potential from pricing 1-2 years out.

Dehaier Medical Systems (DHRM) - 1.5 million shares priced at $8. This was an 'as offered' deal that was nearly impossible to get on ipo. I know of one person who was able to get 1,000 shares and that is it. Opened $10.25 and closed Friday at $12.49 for a massive 56% gain from pricing. China Medical equipment distributor. Is it really this good? No, not at all. This was a case of a very small float controlled by the underwriter in a deal designed to make the underwriter and clients a quick buck. Not a bad company, I liked this one a bit at $8 actually although there was no chance to get it there. This is one of those that a year from now will most likely be back solidly into single digits, and we will take a look at it at that point.

Global Geophyscial (GGS) - Priced 7.5 million shares at $12. Closed Friday at $12. Priced well below range, probably found a level it can sustain here at $12. Seismic operations for the oil and gas industry. Very high capital intensive business has meant GGS has been able to put little on the bottom line. Had a massive one off deal in 2009, meaning 2010 will see a decline in revenues. There is value in here somewhere, but not interested currently.

Mitel Networks (NASDAQ:MITL) - Priced 10.5 million shares at $14. Closed Friday at $12.07, a 14% drop from pricing. Original range here was $18-$20, this was mispriced the whole way. IP based communications for small and medium business. Nothing at all here to be interested in, I panned this deal pretty vigorously at the original $18-$20 range and it could not even hold a slashed $14 pricing. Not a bad company, in a business with hefty competition and no tangible technology advantage. There would be value here $10 or below longer term, but currently no interest here.

SPS Commerce (NASDAQ:SPSC) - Priced 4.1 million shares at $12. Closed Friday at $13.91, a 16% gain. Micro cap on-demand supply chain management software company. Nice little micro-cap in a spot (retail) that has been working in the market. Looks pretty fully valued here, would be interested on a pull back to pricing levels.

Pre-ipo I recommended in range DVOX and DHRM, with a 'neutral' on SPSC and a 'pass' on all the others. At current prices, DVOX is the one that appears to look most attractive going out the next year or so. I would look at SPSC and DHRM on a bit of a pullback. Yes, a very busy week in ipoland, unfortunately most of the deals were just not that enticing.

Disclosure: long DVOX.