Fallen IPOs to Invest in Now
George Putnam, editor of the Turnaround Letter, is always on the lookout for an investment bargain. “We don’t like to pay full price for anything,” he says.
That’s one of the reasons he shuns initial public offerings but starts to troll through the ranks of these companies a few months -- or even a few years -- after they first sell stock to the public. After the excitement of a new offering dies down, so do the stock prices, he says. In fact, it’s not unusual for a once-hot IPO to sell for a fraction of its first-day value within a few years of going public. When the companies are profitable or have compelling business models, that can be a signal to buy. “If something has gone to half the offering price, it starts to interest me,” says Putnam.
Here are four companies that went public less than five years ago but look like bargains today.
Intrepid Potash (symbol IPI) went public in April 2008 at $32 per share and sold for as much as $76. But the stock has been sliding since the financial crisis broke late that year, and it plunged again this May after the company said it would not meet analysts’ growth expectations in 2012. Shares of the Denver-based fertilizer producer now trade at $20.94 -- a bargain price, says Morningstar analyst Jeffrey Stafford (all prices and related data are as of June 20).
Intrepid is compelling for two reasons, Stafford says. First, the company is in the process of adding a new mine to the three it already has in New Mexico; the new facility could boost Intrepid’s output by some 20%. The mine is also likely to cut Intrepid’s overall cost of production, which could give it an edge over its competition. Intrepid already has a geographic edge over many of its Canadian competitors, such as Potash Corp. of Saskatchewan. Because Intrepid’s New Mexico mines are located closer to its customers in the West and Midwest, it spends less shipping its products.
Even though analysts expect Intrepid’s earnings to grow at a blistering annualized pace of 27% over the next three to five years, the stock sells for just 16 times estimated 2012 earnings. Stafford thinks the stock is worth $28 today -- about 34% more than its current price.
NetSpend Holdings (NTSP) markets prepaid debit cards to the roughly 60 million Americans who don’t have traditional banking relationships. Employers or consumers can load the cards with automatic deposits, paychecks or cash and then use them like ordinary debit cards. The Austin, Tex., company went public two years ago at $11 a share. Its stock climbed to as high as $16 last year but then plunged when the company’s growth stalled. It now trades at $ 8.76.
But NetSpend has resumed its growth trajectory, having recently signed deals to provide its cards through Family Dollar Stores and PayPal. Like Intrepid, NetSpend looks attractive on a price-to-growth-rate basis. The shares sell for 16 times projected 2012 earnings, while analysts expect annualized earnings growth of 21% over the next few years. Greg Smith, an analyst at Sterne Agee, thinks the shares will sell for $10 within a year.
Safe Bulkers (SB) is more a value play than a growth story, says Putnam. The Athens-based cargo shipping firm went public in June 2008 at $19 a share and now trades at $6.11. The company has been hurt by weak pricing, thanks to the tepid world economy. But people still need the coal, grain and iron ore that its 20 ships transport. Safe Bulkers’ longstanding expansion plans will bring nine more ships online over the next few years.
Safe Bulkers is seen as a lackluster grower; analysts see average profit gains of 5% annually over the next few years, though the company’s profits have been slipping in recent years. But Putnam says the stock could take off if world economies stabilize and start growing.
Meanwhile, the company has solid financials and pays a 60 cent annual dividend. At the stock’s depressed price, that translates into a mouthwatering yield of 9.8%. That may be a bit too mouthwatering, suggesting that the dividend might be at risk. But Putnam thinks the dividend is safe. He says the company could finance the payouts by borrowing against four new ships that it expects to receive this year. Nonetheless, Safe Bulkers’ fate is closely tied to the overall global economy, so the stock is speculative.
Vanguard Health Systems (VHS), which went public in June 2011 at $18 a share, buys troubled hospitals and attempts to turn them around. The Nashville company has been hard hit by worries that the Affordable Care Act might be overturned. The reform law’s requirement that everyone buy health insurance helps hospitals because they spend millions each year providing care for uninsured emergency patients. With the Supreme Court set to rule within weeks on whether insurance mandates are constitutional, Vanguard’s stock trades at $8.20 -- a fraction of the IPO price.
But the company’s revenues are growing at a double-digit pace, and profits are surging. In the third quarter of fiscal 2012, Vanguard earned $44 million, or 55 cents per share, compared with $2.8 million, or 5 cents per share, in the third quarter of fiscal 2011. The company has substantial debt, which is a risk, Putnam says. But the potential is great. Citigroup analyst Gary Taylor expects the company to earn 71 cents per share this year and projects that the stock will sell for $12 within 12 months.
Kathy Kristof is a contributing editor to Kiplinger’s Personal Finance and author of the book Investing 101. Follow her on Twitter.
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