3 IPOs That Will Rise From The Market's Ashes

Includes: AWAY, MSFT, YNDX
by: Joshua Hayes

One thing I enjoy about a poor market environment is that it separates the winners from the losers. In the IPO arena this can be clearly seen by which stocks tank into the single digit territory and which stocks hold strong with higher stock prices.

In a bad market environment many newly issued stocks will have deep pullbacks while some just end up getting completely destroyed. Very few are actually supported by institutional investors during downtrends that then allows the stock to rally higher when the market is ready to turn around into a new bull cycle.

IPOs that have a record of producing big gains historically, once the market resumes an uptrend, are always going to be higher priced. You wont find any IPOs that start at 50, go to 5 during a downtrend, and then lead to the upside once the market resumes higher.

On that note, you also will not find these future leaders selling at a cheap P/E ratio. Unlike the average investor, I know the P/E ratio, via 130 years of facts, is completely meaningless when it comes to investing in the best stocks that produce the biggest gains during market uptrends. So the best IPOs are never going to be “cheap” and are never going to be “on sale” to the P/E ratio crowd.

What is and always will be more important is growth. Past, current, and future growth. If it is there, then that is what institutional investors and their big piles of money want. You can easily watch them go to work in the market by tracking volume. The big boys can’t hide their buying and selling.

The three stocks below all have the characteristics that have been seen in other past winning IPOs.

The first one is a darling of Wall Street bears. LinkedIn (LNKD) is a Mountain View, CA provider of a social networking platform that enables members to share their professional identity online via Linkedin.com.

EPS growth has been outstanding over the past seven quarters, with gains of 233%, 600%, 500%, 700%, 50%, and 43%. During the past eight quarters sales growth has been even more impressive with gains of 100%, 92%, 98%, 107%, 108%, 110%, and 120%. These gains are expected to continue well into the future with 2012 annual EPS estimates of 0.35 which is a 1,000%+ gain year-over-year. This huge growth is the main reason it trades at a 311 P/E which will come down during this bear market but will never be “cheap enough” to the average Wall Street investor.

Take the above growth with the company having 0% debt to shareholder equity, a cash flow of $0.41, and a Return on Equity of 88% and you clearly see why management owns 56% of the shares outstanding and 202 mutual funds already own 99% of the current unlocked float.

On top of these great numbers it is clear Linkedin has bigger ideas as it spends 26.8% on Research and Development. A very impressive number showing they are willing to come up with new products/ideas for the future.

Next, we have Yandex (NASDAQ:YNDX). Yandex is a Netherlands-based Russian provider of internet search and web content including news, mail and maps via Yandex.ru.

EPS growth the past eight quarters has been an impressive 17%, 25%, 150%, 80%, 100%, 80%, and 20%. During this same time, sales growth has been 47%, 56%, 40%, 42%, 47%, 71%, and 76%. Annual EPS estimates for 2011 and 2012 is for gains of 53% and 52% respectively. With a P/E ratio of 65 it’s still pricey but just like Linkedin do not expect this P/E to get below 30 during this stock market pullback.

Yet again, we have another company with 0% debt to shareholder equity, a strong cash flow of $0.51, and a Return on Equity of 47%. This strong growth is why management holds 58% of the shares outstanding and 247 mutual funds own 99% of the current unlocked float.

Finally, we have Homeaway (NASDAQ:AWAY). Homeaway is an Austin, TX operator of an online marketplace for vacation rentals in over 145 countries through over 560,000 listings on Homeaway.com.

Growth at Homeaway isn’t as exciting as the previous two companies but that is about to change as 2011 and 2012 EPS estimates are for gains of 999%+ and 17% respectively. During the past two quarters we can see the growth starting to pick up with gains of 300% and 50%. The biggest indication that the earnings will continue is from sales growth. Sales growth during the past eight quarters has grown 56%, 45%, 36%, 37%, 42%, 44%, and 41%.

This company also does not carry any debt, has a cash flow of $0.25, but sadly does not have any Return on Equity data from my data provider.

The strong growth in this company is the reason 117 mutual funds have initiated positions making up 19% of the float. Management owns 46% of the shares outstanding and as long as they hold on to their shares you know they are putting their money where their mouth is.

These stocks are stellar growth companies with amazing growth in all the key fundamental areas. They are also all currently priced over $25 a share. Quality rises to the top and in this market nothing is going to rise to the top as long as the overall market is under distribution. Still, one day the market will find a floor and when it does these IPOs will be in a better position to become part of the leading stocks in the next rally thanks to their growing fundamentals and mutual fund sponsorship.

IPOs with strong fundamentals that stay above the magic $10 level during downtrends have a history of rebounding and producing much bigger gains than their sub-$10 cohorts. IPOs that stay above $10 and have big growth in their fundamentals along with institutional support go on to be the new leaders in new bull markets.

I am not interested in buying any of these stocks in this current market environment. When this market finally finds a floor and begins to rally on strong accumulation, which will clearly show up in the charts as heavy volume, I will then hunt for proper entries. An uptrend is first required before investing in these fundamental powerhouses can even be considered. Why? Three out of four stocks follow the general market trend. I am not fighting those odds.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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