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3 IPO Flops Poised for Comebacks - 12658 views
MINNEAPOLIS (Stockpickr) -- There are always reasons to sell stocks no matter what the market conditions, but recent events in Japan justifiably give investors pause. The stock market is a tough racket. Just when you think it is safe to enter the water, prices move south.
That ability to tease has me thinking about a category of stocks that evoke plenty of emotion for investors: the initial public offering, or IPO. Wall Street is quite adept at selling investments. Over the years, the reputation of the initial public offering is such that individual investors will blindly jump in no matter the price.
The illusion is that these initial offerings rocket to the moon and offer investors a chance to make big returns. History, though, does not support the promise. Most IPOs don’t make money especially over the last several years.
Typically the only sure way to make money in an IPO is to be awarded shares prior to the stock's trading on the market. Those awarded shares at the initial offering price then flip the stock by selling shares for a quick profit. Since it is mainly institutions that are granted these shares before they trade, the little guy is stuck chasing a stock that may ultimately fall in value.
The market is littered with IPOs that now trade at levels below the initial offering price. Some are actually very good businesses that have stumbled for whatever reason. Perhaps they were never worth the hype to begin with.
With the bubble pricked, investors in IPOs that have sputtered have an equal shot to make money going forward. After the air has been released, what is left is more-traditional valuation. Some of these stocks have been forgotten by investors and thus offer opportunity for new investors today.
Here are three IPOs that have sputtered to consider for your portfolio.
So much was made of General Motors (GM) righting the ship, but someone forgot to tell the market. Shares of GM opened to much hyperbole at the end of last year. Those who bought the stock at the peak are now down some 20%. Those who were awarded initial shares received the obligatory bump in share price, but they would have needed to sell quickly to capture the profit.
Only a few months have passed since the initial offering, but investors can now look at GM without the noise of a Wall Street road show. What they see should be a bit inspirational given today’s prices.
Analysts expect the new GM to make $4.02 in 2011. That number jumps 26% to $5.08 in 2012. At the current price of around $31 per share, GM trades for 8 times 2011 estimates and 6 times 2012 estimates. That is a cheap price for 26% growth.
I would be a buyer of GM at these prices.
Another auto play is Tesla Motors (TSLA). This electric car maker came to market last summer with much hype. Surely that meant the stock would tank immediately after going public, but then something surprising happened: Tesla shares shot up in price to nearly double its initial offering price.
When the stock peaked at the end of last year, those who'd hung on for the ride decided to take profits. Shares subsequently fell and now trade at or near levels garnered when first coming to market. I would not call this a busted IPO, per se, but to be able to buy a hot stock like this at opening prices some nine months later may be an opportunity.
If you consider that oil prices have skyrocketed while shares of Tesla sank, perhaps shares are cheap today. It all depends on valuation and the outlook for electric vehicles in a decidedly crude based world.
The bottom line is that this company is losing money. Even though Tesla is well-capitalized, losses are painful. Analysts expect the company to lose $2.05 per share in 2011, with a smaller loss of $1.41 a share in 2012.
That is progress, but is it enough? With this stock, it is all about the future. The potential is massive, but will the new technology take hold? Investors in Tesla will need to be patient. Incremental improvements will help send shares higher, but profits and market penetration will send shares through the roof.
A more traditional busted IPO is Vonage (VG). Reminiscent of the dot-com days of crazy promotion of the next hot idea, Vonage burst on the scene with its sexy Voice over Internet phone service. The promise attracted investors to oversubscribe the offering, but this stock was dead on arrival.
Despite its coming to market in the middle of a very healthy bull market in 2006, investors quickly realized that Vonage did not have a business plan that would make money. Oh, sure, it could promote its products and generate revenue, but what about profits?
Investors are catching on. Shares of Vonage sank from the opening price in the mid-teens to penny stock status below $1 per share. Since bottoming in the fall of 2009, the stock has rallied strongly. Shares now trade at around $4 per share.
The company started its move after announcing that it would be offering international call service. In addition, Vonage jumped on the Apple (AAPL) iPhone train with its own app for the smartphone.
More important, the company is on its way to profitability. Analysts expect Vonage to make a modest 28 cents per share in 2011 after posting a small loss in 2010. At its current price, Vonage trades around a reasonable 16 times forward earnings estimates.
I believe there is real growth opportunity with this stock. The company is still advertising like crazy, and its low-price service may strike a chord with cash-strapped consumers. I’m actually considering the service for my home phone service.
Now years removed from its IPO, Vonage is a reasonable speculation for today’s investor.
To see these stocks in action, visit the 3 IPOs That Sputtered portfolio.
-- Written by Jamie Dlugosch in Minneapolis.
At the time of publication, author had no positions in stocks mentioned.
Jamie Dlugosch is a founder and contributor to MainStreet Investor and MainStreet Accredited Investor. Formerly, he was president and CEO of Al Frank Asset Management. He has contributed editorially to The Rational Investor, The Prudent Speculator, Penny Stock Winners and InvestorPlace Media.