Here's our advice for Twitter's initial public offering, summed up in less than 140 characters: Don't invest in the Twitter IPO. It's not that Twitter's stock -- likely to be priced at $17 to $20 per share, according to regulatory filings on October 24 -- won't turn out to be a good investment. Maybe it will. Or maybe it won't. Time will tell. But our advice for any IPO is to wait at least 90 days before buying in. That allows enough time for the hype to die down and rational analysis of a company’s business prospects to take over.
This approach paid off handsomely with the Facebook (symbol FB) IPO. The stock debuted on May 18, 2012, at $38. By session's end its price had gained just 23 cents, defying widespread predictions of a massive first-day pop. Three months after the IPO, Facebook was down to $20. Opportunistic investors who bought at that point have since enjoyed a 160% return (all prices as of October 17).
IPO expert Josef Schuster says the risk for individual investors is getting caught up in the buzz about hot IPOs that later crash while overlooking less attractive “cold deals.”
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“Our great performers are the boring IPOs that the individual investor may have neglected --, like HCA Holdings (HCA), which didn’t do anything for a long time and is now trading at all-time highs," says Schuster, who runs a Chicago-based IPO research firm, IPOX Schuster LLC. "Dollar General (DG) — it wasn’t a ‘hot IPO.’ It didn’t do anything on the first day. But it went up over the long run.”
Schuster created an index of stocks that come onto the market as IPOs or corporate spinoffs. The index is the basis for an exchange-traded fund, First Trust US IPO Index (FPX). Schuster’s rules for his index specify that an IPO will be added no sooner than six trading days after it debuts to avoid the volatility of the first few sessions.
Consider investing in the ETF for broad exposure to the IPO market. The fund is up 38% year to date — better than the 24% return of Standard & Poor’s 500-stock index.
Looking for individual stocks? A number of IPOs that have turned cold since their debuts within the past couple of years may intrigue investors with an appetite for out-of-favor shares. Here are four worth considering:
SeaWorld Entertainment (SEAS) went public in April with a first-day splash befitting Shamu’s owner. Ahead of the IPO it posted 2012 sales growth of more than 7%, better than Cedar Fair (FUN) and Six Flags Entertainment (SIX). In its first report as a public company, however, SeaWorld’s earnings came in below analysts’ forecasts. Investors were spooked at the news of a 9.5% decline in attendance in the second quarter of 2013. The shares, at $29.57 now trade below their first-day close and are priced at 22 times estimated 2014 earnings. SeaWorld’s stock yields 2.7%.
Poor weather in the second quarter hurt attendance at nearly all SeaWorld parks. But the visitors who did attend spent more to get in, says Barclays Capital analyst Felicia Hendrix, and spent more on concessions once they were inside, boosting revenue per attendee by 6.7%. Hendrix says the company’s second-half performance will influence the share price in the short term. In the long run the company’s strong brands, including Busch Gardens and the namesake SeaWorld parks, will keep its coffers brimming.
TRI Pointe Homes (TPH) and Ply Gem Holdings (PGEM) went public earlier this year as the U.S. housing market showed signs of life post-recession. Each stock gained more than 10% on the first day of trading. More recently, though, they’ve both been caught up in fears that rising mortgage rates will stop the housing rebound in its tracks.
TRI Pointe is a homebuilder operating exclusively in Colorado and its home state of California. Analyst Steve Stelmach, of FBR Capital Markets, who has a “buy” rating on the stock, says the company has a strong portfolio of land and is generating orders at a better-than-expected pace. At $13.92, shares are well below Stelmach’s $24 price target.
Ply Gem sells construction products to builders, including siding, windows and doors. Expectations of a slowing recovery in homebuilding recently prompted analyst Daniel Oppenheim, of Credit Suisse, to lower the target price that accompanies his “buy” rating to $21 — 43% above today’s levels of $14.68.
Millennial Media (MM) was a hot IPO, jumping 92% on its first day of trading in March 2012. But investors soured quickly as the provider of mobile advertising fell short of some analysts’ financial forecasts in its first report as a public company. Today, at $6.88, it trades at one-fourth its all-time high.
Millennial Media has big competition — Apple (AAPL) and Google (GOOG) — but it claims to be the largest company that isn’t affiliated with a single operating system or set of mobile devices. It’s bulking up, buying privately held competitor Jumptap in a stock-and-cash deal initially valued at about $200 million.
The risk of the large acquisition, coupled with recent financial results that missed management’s forecast, has led a number of analysts to assign “hold” ratings. But analysts also say there’s plenty of potential in a company that reported a 45% gain in sales in the second quarter. “The stock’s current valuation likely does not give enough credit for expected growth,” says Michael Graham, of Canaccord Genuity, whose 12-month target price of $10 represents a gain of 45% from today’s levels.
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