I'll be the first one to admit that I've been a pretty harsh cynic when it comes to IPOs. And if you know me, then you know I almost always avoid them; and for good reason, too.
The truth is that most individual investors don't get the chance to get in on the ground floor, and they often jump on after they see an IPO skyrocket right before it falls back to earth.
Having said that, every once in a while market conditions combine with the right companies coming public to provide some pretty interesting opportunities. The IPO market is certainly strong, with 82% of companies who came public in the first quarter above their IPO prices. That's up from 60% in the first quarter of last year and 42% in Q1 of 2011. And fortunately, there are some solid companies coming through the IPO pipeline. Here are three I especially like right now.
Red-Hot IPO #1: The first is Sea World (SEAS), which could easily be one of the five biggest offerings in the U.S. this year .This may come as a surprise, but SEAS is actually a smart stock to own during a slow moving economy. With job creation still sluggish and underemployment also a problem, consumers remain somewhat cautious with their hard-earned dollars. One area they are spending money in is "experiences," which is exactly what Sea World has to offer.
The company owns and operates 11 U.S. theme parks, including the popular SeaWorld®, Busch Gardens® and Sesame Place® brands that hosted more than 24 million guests in 2012. The big growth driver, besides a resurgence in domestic family vacation travel, is SeaWorld Parks & Entertainment's expansion into popular brands in media and entertainment platforms to connect people with nature and animals through movies, television and digital media. SeaWorld is also developing new lines of licensed consumer products.
I am also impressed with how financially strong Sea World is. Over the past three years since being bought out by Blackstone, the company's revenues have been on the up and up, jumping up 7% to $1.4 billion. Earnings soared to more than $77 million last year, up from $19 million in 2011.
Red-Hot IPO #2: Fairway Group Holdings Corp. (FWM) is a grocery-store chain focused in the greater New York area. What I love about this supermarket chain are the great prices and their focus on organic, fresh food. But at the same time, it has a bustling no-nonsense New York fresh fruit and vegetable stand feel to it rather than a new age fancy Whole Foods Boulder/Silicon Valley feel.
Still, I'm not buying just because I'm a New Yorker. I want to see a return on my investment! And it looks like Fairway will do just that. The company currently has 12 stores, but the plan is for this supermarket chain to expand nationally and open 300 stores. In their fiscal year that ended in April 2012, revenues rose 14 percent, to $555 million from the year earlier. In fact, from 2009 to 2012, Fairway increased annual sales by almost 66%. According to their regulatory filing, at the end of April, Fairway will report fourth-quarter total net sales of between $175 million and $178 million, up nicely from $150 million for the year earlier quarter.
FWM just went public last week, ringing the NASDAQ opening bell in celebration of its debut on Wednesday, April 17. The IPO shares were priced at $13, which was above the expected range of $10 to $12, and the stock opened for trading at $18, and it saw its shares surge close to 40%. If that holds, insiders will want to take profits when their restriction period ends and they're able to sell shares, typically after 180 days, which can often be a good time to buy.
Red-Hot IPO #3: One IPO that I am awaiting is a cloud computing company. ChannelAdvisor (soon to be ECOM) provides cloud-based e-commerce software that allows retailers and manufacturers to advertise and list products on Amazon, Google, eBay, Facebook and more. Their offerings include automation, analytics and optimization. Users can manage product listings, inventory availability, pricing optimization, search terms, data analytics--just to name a few.
ChannelAdvisor has proved itself worthy through its revenues, increasing from $36.7 million to $53.6 million from 2010 to 2012. And so far, the company, while still privately held, has raised $76 million from notable companies including eBay, New Enterprise Associates, and Kodiak Venture Partners. I will be paying close attention to the pricing of ChannelAdvisor and its first day of trading.
Before You Start Investing...
Although I like an unusually large number of current and potential IPOs right now, I almost never recommend that you buy a stock right after it starts trading. You see, IPOs are a glaring example of how the game is rigged against individual investors. When a hot new IPO comes to market, only insiders can get their hands on shares. The bank backing the IPO then hypes it to the moon, driving up investor demand.
Eager investors who were locked out from investing very often jump in and buy on the first day of trading, which sends the stock soaring. Those insiders then make a quick exit, pocketing their hefty gains. Demand frequently dries up and the stock price falls, leaving all those individual investors holding the bag.
Here's the thing: You don't need to gobble up shares the moment they start trading. If you know the rhythm of an IPO and take the time to research the company going public, you can first sort the blockbusters from the bombs, and then get in as the insiders sell their shares and before the next leg up. That's the smarter and less-risky want to play the relatively few IPOs that are worth investing in anyway.