4 New Issues Every Growth Investor Should Own

by: Joshua Hayes

Initial Public Offerings are the lifeblood of the stock market. Without new exciting companies taking the reins from older companies, you would not have a very dynamic market place.

Lately, there have been quite a few new issues coming public. Unfortunately, a lot of these stocks do not have the characteristics necessary to make them potential leading stocks that will go on to produce huge returns for early investors.

The good news is that there are four stocks, that have come public recently, that do share the characteristics of past stock market winners. Let's take a look at four IPOs that have the characteristics seen in your normal leading stock.

What is a leading stock? A leading stock has strong EPS growth, strong sales growth, a high profit margin, a high return on equity, low to zero debt to shareholder equity, mutual fund ownership growth, management ownership, high future EPS estimates, a high Relative Strength line to the overall market, and is within 15-20% of its 52-week high.

First, let's take a look at Natural Grocers (NYSE:NGVC). Natural Grocers is a Lakewood, CO operator of 55 natural and organic supermarkets in 11 states featuring groceries and dietary supplements.

Natural Grocers EPS has recently turned a corner, growing 167%, 100%, and 105% the past three quarters. Driving this turnaround in EPS has been sales. Sales have grown 12%, 11%, 15%, 18%, 21%, 23%, 28%, and 228% the past eight quarters.

Currently, my premium data provider MarketSmith does not have any future annual EPS estimates for 2012 and 2013. However, the trend in the EPS and sales is clear and with an annual EPS growth rate of 12% everything should continue to move along in a steady manner.

Natural Grocers has 113% debt to shareholder equity, a high return on equity of 28%, a profit margin of 2.46%, and a cash flow of $0.50 per share. The current P/E ratio of 65 is at the high end of its short historical range of 57-68. Savvy investors understand that a high P/E ratio in a young growth stock is not necessarily an issue.

My premium data provider does not currently have management and mutual fund ownership numbers. Investors can be certain, with the trend in EPS and sales growth, that mutual funds will be accumulating shares as long as the growth continues. On top of that, management will certainly hang on to a portion of the shares outstanding so that they may be rewarded for their hard work.

Next we have a company that is producing some very large gains in earnings and sales. Kayak Software (NASDAQ:KYAK).

Kayak Software is a Norwalk, CT provider of online travel offers and services from hundreds of other travel websites via kayak.com.

Kayak Software's EPS growth is explosive, growing 25%, 25%, 25%, N/A, 180%, 180%, 180%, and 161% the past eight quarters. Sales are just as impressive, growing 55%, 70%, 51%, 43%, 30%, 28%, 27%, and 39% during the same period. Even more impressive are the estimates with 2012 and 2013 annual EPS estimates for gains of 148% and 45% respectively.

Kayak Software has 0% debt to shareholder equity and a cash flow of $0.48 per share. The current P/E ratio of 60 is in the low end of its short-historical range of 57-67.

Currently, there is no mutual fund ownership data available for Kayak Software. However, management owns an incredibly large 78% of the shares outstanding. When management is this heavily invested in their own company, it tells you a lot about the future projected direction of the share price.

The next stock on my list is another software related stock. Palo Alto Networks (NYSE:PANW).

Palo Alto Networks is a Santa Clara, CA provider of network security infrastructure products for enterprises, service providers, and government entities.

Palo Alto Networks has just recently turned profitable with EPS growing 250%, 150%, and 125% the past three quarters. This turn in profitability is directly linked to sales which have grown 265%, 65%, 122%, 155%, 230%, 183%, 110%, and 111% the past eight quarters.

Earnings estimates for 2013 are for a 53% slowdown. However, estimates have already been raised once and if the current sales growth continues it will be raised again.

Palo Alto Networks has 0% debt to shareholder equity, spends 18% of sales on R&D, and has a cash flow of $-0.15 per share. With the company now making money and having 0% debt, the cash flow should improve with the life of the stock.

With the stock being such a new issue there is no mutual fund ownership data. Personal management owns 36% of the shares outstanding. This is a nice size position and ensures that they will work to make sure the stock price appreciates.

The final stock on our list is Acquity Group Limited (NYSEMKT:AQ-OLD). Acquity Group Limited is a Chicago-based provider of end-to-end digital strategy, multi-channel digital marketing, and brand e-commerce technology consulting services.

Acquity Group Limited's EPS growth has been massive, growing 150%, 250%, 800%, 130%, 800%, 333%, -50%, and 100% the past eight quarters. The growth in sales is just as stellar, growing 37%, 51%, 61%, 42%, 42%, 53%, 49%, and 59% the past eight quarters. Annual EPS estimates for 2012 and 2013 are for large gains of 94% and 41% respectively.

Acquity Group Limited has 0% debt to shareholder equity, a return on equity of 16%, a profit margin of 8.96%, and a cash flow of $0.27 per share. The current P/E ratio of 19 is in the high end of its short historical range of 10-19.

There are currently 5 mutual funds invested in this stock but this number will grow as long their growth continues. Management only owns 10% of the shares outstanding but that is a healthy enough chunk to make sure they work to make their company's share price appreciate.

All of the stocks above make excellent investments for long-term investors, as long as the growth continues. Back-to-back quarters of EPS and sales deceleration would be a concern and it would be prudent to re-analyze the trade to see if it still is a wise investment.

I am a trend following investor and that means I only want to be long these stocks as they trend higher.

National Grocers, Kayak Software, and Palo Alto Networks have only recently traded enough sessions to create a 10-day moving average. I will be looking to get long these stocks as they produce pocket pivot point buy signals (volume on the day of the signal must be higher than any down volume in the past ten sessions) off the 10-day moving average.

Other areas I would look to buy these stocks would be breakouts to new highs confirmed by volume. Without volume, a trade into new high ground will not be executed.

Acquity Group Limited has traded long enough that it now has a 50 day moving average. A move off the 50-day moving average, a pocket pivot point buy signal off the 10-day moving average, or a breakout to new highs confirmed by volume, will all be used as signals to get long.

One final note. If I make a purchase and the position does not move higher immediately, I will quickly cut my losses and wait for a better entry signal. In the stock market, if you do not cut your losses, eventually you will take the ultimate loss.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in KYAK, PANW, NGVC, AQ-OLD over the next 72 hours.