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Great Bargains Among Slim IPO Pickings

By Linda McDonough on December 27, 2016

The year might IPOs could have stood for Infinitesimal Paltry Offerings instead of Initial Public Offerings. Year to date, a meager 105 IPOs have been priced, versus 170 in 2015 and 274 in record year 2014.

Yet buried in that small pile of deals were some terrific bargains. In fact, my best performing stock this year, up a rousing 47% since October, was bought just after its IPO pricing. With the IPO market in the doldrums, investors were looking elsewhere for new ideas, leaving some great IPO stocks available for the picking.

The rocky start to 2015 sent most IPO hopefuls off to purgatory where they delayed their deals in hopes of a kinder market. The Fed’s first rate hike on Dec. 16, 2015 sent the market into a tailspin at the start of this year. The S&P 500 dropped almost 9% in the first six weeks of the year as investors wrung their hands over a potential economic freeze from the higher rates.  

By March a solid outlook by many companies reporting fourth quarter earnings assured investors that the wheels weren’t falling off the bus and opened the door for a rush of IPOs. Indeed, April and May produced triple the amount of IPOs than January and February.

The late June Brexit shock muffled what is traditionally a quiet deal period. Summer 2015 was a barren stretch for IPO pricings. Anyone left desiring to go public was advised to price their deal before the election. This group of deals, priced in flurry, offered many great values. Two other Profit Catalyst Alert portfolio holdings are IPOs from this super busy crunch time.

I have often found many of my best ideas, long and short, from the IPO market. Most professional managers are up to their eyeballs taking care of the names currently in their portfolios. Due diligence, calls with company managements and analysis of quarterly earnings leaves little time to investigate names in the IPO channel.

While almost every mutual fund and hedge fund sends an analyst to attend IPO roadshows, the best they often come away with is a potential future long recommendation and a stomach full of rubber chicken. The problem is that most IPOs do not offer enough shares for public trading to allow big investors to make a bet big enough to influence the performance of their overall fund.

Most IPOs offered up just a fraction of their total shares to the public. Acacia Communications, the best performing IPO of this year, offered just 12% of its total shares on its debut as a public company. The 4.5 million shares it offered sounds like a lot, but isn’t enough to move the needle of performance for big institutional buyers like mutual funds.

That total of 4.5 million shares is split up between hundreds of big stock buyers who put bids in for a piece of the IPO. If they’re lucky they’ll get 50 to 100 thousand shares, a fortune for little investors, but a pittance in their billion-dollar portfolios. As newly born IPO companies offer more and more stock to the market via secondary offerings the stocks have a better chance of becoming core holdings for big funds.

This imbalance in demand can offer the little guy a chance to find some great bargains. I’ll leave mega deals like Alibaba, which offered 320 million shares on its IPO, or SnapChat, likely to be a $25 to $35 billion dollar deal, for the big investors. While the elephants in the market are crowding around these massive deals, I’ll be lurking around the edges of the IPO market looking for new stocks to add to the Profit Catalyst Alert portfolio.


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