By Michael Brush, MSN Money
The stock market keeps hitting new highs, but that's not the only sign investors are finally shaking off the gloom and doom.
Here's another: Initial public offerings are flowing fast and furious. In May, the number of IPOs will hit its highest monthly rate since 2007, says Nick Einhorn of Renaissance Capital, an IPO investment and research firm.
Not surprisingly, IPOs are running thick in areas where the market is the hottest: Tech, housing, health care and popular high-yield investments. One even came with killer whales: SeaWorld Entertainment (SEAS), which operates water parks and giant aquariums, hit the market last month.
This rush of IPOs brings with it the usual combo of riches, risks and rules of thumb:
- The riches: Hot tech IPOs like Marketo (MKTO) and Tableau Software (DATA) were up 77.7% and 65.7%, respectively, in their first day of trading last week.
- The risks: As freshly minted stocks, IPOs can be incredibly volatile when bad news strikes or insiders rush to sell on the expiration of share lockups that held them back. Many IPOs eventually trade through their opening prices, but there's no guarantee.
- The rules of thumb: Don't chase IPOs, particularly if you can't get in on insider pricing. Move in slowly over time, and put in limited amounts of money. Yes, that age-old Wall Street annoyance still lingers in IPO land. It can be tough to get access to the hottest IPOs at the best prices, given to insiders before shares start trading. The Wall Street banks reserve the sweetest deals for their fattest clients; unless you have a huge brokerage account, that might not include you.
Is the current IPO rush a contrarian signal that the market is about to crash? Not really. I asked Thomson Reuters to chart monthly IPO flow against Standard & Poor's 500 Index ($INX) returns over the past 30 years. While the late 1990s tech boom IPO surge presaged a crash, there's otherwise no apparent correlation.
ChannelAdvisor (ECOM) has just what you want to see in an IPO: exposure to a hot trend that will last for years. This company helps retailers sell stuff online at sites like eBay (EBAY) and Amazon.com (AMZN), and get the best positioning in search results on sites like Bing and Google (GOOG).
Roughly 2,000 customers processed $3.5 billion worth of sales last year through ChannelAdvisor's platform, including Dell (DELL), Jos. A. Bank Clothiers (JOSB), Sony (SNE) and Ann (ANN), the parent company of the Ann Taylor and Loft clothing retailers.
The high growth trend? That's Internet sales, of course, which should grow 15% a year to $1.1 trillion in 2016, from $534 billion in 2011, according to Forrester Research. This helps explain why core revenue at the company grew 25% a year 2010-2012 to $51.2 million. "They offer a much needed service," says Tom Taulli, who writes the IPO Playbook at InvestorPlace.com
The ChannelAdvisor IPO is being managed by Goldman Sachs (GS), often a good sign, since this is one of the most prestigious IPO shops. The IPO should roll out over the next few weeks. It's supposed to be priced at about $12 to $14, but my guess is that'll get bumped up.
The Internet has forever changed the way we shop, both for ourselves and for our employers while we are on the job. We can now do a lot of research online before we ever have to talk with anyone. This seems to cut salespeople out of the loop. Marketo (MKTO) puts 'em right back in the game.
Marketo offers software apps that help salespeople influence the way shoppers do their research online. Marketo software also helps salespeople profile their customers by giving them a glimpse at the customers' record of purchase histories, website visits, Webinar attendance, document downloads and social-network activity anywhere on the Web. This information helps salespeople refine their pitches. Marketo apps also allow managers to track the effectiveness of sales staff.
Marketo has more than 2,300 customers across a broad array of sectors. They include Gannett (GCI),General Electric (GE), Panasonic (PCRFY) and Symantec (SYMC). Its products are popular; first-quarter revenue grew 62%, year over year, to $19.7 million. "I know a lot of companies that use their technology, and they love it," says IPO Playbook's Taulli.
Investors love the stock, too. One reason: A similar company, Eloqua, went public in 2012 and got bought out by Oracle (ORCL) in a rich deal for shareholders, points out Einhorn at Renaissance Capital, which runs the IPO mutual fund Global IPO Plus Aftermarket (IPOSX).
Tableau Software (DATA) helps everyday people like you and me become "data whisperers." Its software makes it easier to extract wisdom from data, visualize it better and share insights with others. Think of it as a spreadsheet on steroids.
Its visual query language, called VizQ, simplifies data queries by eliminating chart wizards and dialogue boxes. VizQ and the rest of the product platform were developed at Stanford University, and they're popular, to say the least. Sales grew 93% a year, annualized, 2010 to 2012, reaching $127.7 million. "It's growing really fast," says Einhorn. "This is one of the most exciting IPOs."
There may be plenty more growth over the next decade, given the challenge of sorting through all the data we're accumulating. Companies and other organizations will double the amount of data they have every two years for years to come, predicts International Data Corp. "Tableau is part of the big data megatrend," says Taulli.
Tableau's stock could do well from here, if history is any guide. A similar company, Splunk (SPLK), has advanced sharply, points out Dennis Wassung, a portfolio manager at Cabot Money Management, which owns Splunk. That stock is up 36% from the mid-$30 range, where it traded in its early days last summer, to about $45.
Home construction-related IPOs are rolling out hand over fist. This isn't surprising, given the renewed strength in the housing market, which looks likely to continue, fueled by an improving economy, rock bottom mortgage rates, dwindling supply of houses and population growth. One to watch: HD Supply. (There's no ticker symbol yet.)
The company distributes products like lighting, cabinets, plumbing supplies, appliances, pipes, valves, meters and water treatment products to contractors, homebuilders, the government and industrial companies. HD Supply is not a manufacturer; instead it offers services like training and inventory management.
Growth here is solid: Sales advanced 14.3% last year to $8 billion. The company has more than 600 locations in 46 states and Canada. In addition to the ongoing rebound in housing, HD Supply should also benefit from another megatrend: the need to upgrade our water infrastructure, says Taulli. In the past few years, HD Supply has cut costs and put in a centralized distribution center, which should juice profitability as sales improve, he adds.
The IPO proceeds will be used to pay down debt, rather than invest in the business. That's not the best use of IPO funds, but it's typical for a company being floated by private-equity investors. HD Supply was purchased from Home Depot (HD) in the summer of 2007 by Bain Capital Partners and the Carlyle Group. Now it's being spun out as a public company.
One good omen here: The stock of a similar company, Boise Cascade (BCC), is up about 15% to about $30, from its early trading as an IPO in February. HD Supply will likely go public this summer, perhaps in July, says Einhorn.
Ply Gem (PGEM) sells siding, fencing, stone, windows and doors to home centers, lumberyards, builders and distributors. This makes it another play on the home construction rebound.
Single-family housing starts were at just 535,000 in 2012, which is 49% below the 50-year average, according to the National Association of Home Builders. This shows just how much room there is to grow, as the housing sector moves back toward normal.
Plus, many people held off on home repairs during the recession, so there is pent-up demand for Ply Gem products. Sales growth is already solid, advancing 7.5% year over year in the first quarter to $257 million.
Ply Gem has been cutting costs and consolidating plants, so profitability should improve nicely as sales advance. The stock should start trading May 23, says Einhorn.
As the name suggests, Global Brass and Copper (BRSS) makes copper and brass alloy sheets, rods, tubes and foils. It products are used in home construction and the auto sector, so those two big-picture trends should help.
Housing I've covered. The average age of vehicles on the road is now more than 11 years, so auto sales growth should remain strong as well.
Global Brass and Copper controls about 40% of North American capacity for copper and copper-alloy sheets, plates and brass rods. But it operates in 28 countries, and it sells products in China, so it is an emerging markets play, too.
Global Brass and Copper, which sells metal under the brand names Olin Brass, Chase Brass and A.J. Oster, will pay a 0.9% dividend yield, says Einhorn.
And here's a little change on the horizon that could boost sales: There's a move afoot in Washington, D.C., to eliminate the dollar bill. If this happens, Global Brass and Copper will likely supply the metal for the new dollar coins we'll need. Its metal is also used in ammunition casings and electronics.
This stock should begin trading May 23, says Einhorn.
It's no surprise to see several home builder IPOs -- and to see them doing well. Case in point: The stock ofTaylor Morrison Home (TMHC) is up about 8.5% from its early days of trading in mid-April, selling recently for $25.50. Given the ongoing boom in housing, this stock could continue to do well.
Taylor Morrison operates in California, Arizona, Colorado, Texas and Florida, and it has a top-10 market share position in many of the hottest housing markets. So it should benefit nicely from what I expect will be ongoing improvements in the economy, employment and consumer confidence. Another plus: The near-record affordability of homes because mortgage rates are so low. The company also has a solid balance sheet and decent profit margins.
Taylor Morrison sells homes in Canada, too, mainly around Toronto. That adds diversity to its revenue mix, and it helped the company stay profitable during the recession, says Einhorn. But it's also a potential risk factor, since several analysts believe the Canadian housing mark
Insider buying at the time of an IPO is typically a good sign, and that's what we see at this biotech company, which is developing drugs for immune-system-related disorders like multiple sclerosis. Four directors bought more than $12 million worth of Receptos (RCPT) stock on May 14, at $14 a share, as shares started trading.
Of course, biotech companies can be risky. If a drug trial fails, a stock can blow up. But top managers at Receptos have extensive experience in biotech at companies like Facet Biotech, which was bought byAbbott Laboratories (ABT), Biogen Idec (BIIB), Bristol-Myers Squibb (BMY) and Genentech.
The company's drug candidates may also be used to treat colitis, type-2 diabetes and a rare allergic and immune-system related disorder called eosinophilic esophagitis. Drugs for rare diseases like this one get fast-track approval status by the Food and Drug Administration, and companies can charge a lot for such treatments, so they can produce high profit margins.
Bausch + Lomb is best known for its contact lenses. But this eye-care company offers more than 300 products, including over-the-counter and prescription drugs and surgical supplies.
Bausch + Lomb, which has been around since 1853, was taken private in 2007 when the stock got cheap following some product recalls and earnings restatements. Now the private equity shop that took it over,Warburg Pincus, is rolling it back out as a public company. (There's no ticker symbol yet.)
Bausch + Lomb could be an attractive IPO for several reasons. First, it has a powerful brand that instills confidence, which is important in health care. "This is a well-known franchise in ophthalmology," says David Heupel, an analyst at Thrivent Financial for Lutherans. Next, a similar company, Cooper Companies(COO), shows decent growth and profitability, and it trades at a healthy valuation of about 16 times forward earnings. This bodes well for Bausch + Lomb, he says.
Heupel expects growth from innovations such as next-generation silicone hydrogel contact lenses and a new laser-guided cataract surgery platform. The company is also a play on the aging of the population and the rise in diabetes, which can create vision problems. Bausch + Lomb also has a broad geographical reach: It is in more than 100 countries. So it's also a play on middle-class growth in emerging markets, notes Taulli, of IPOPlaybook. Bausch + Lomb's IPO may roll out in June or July, says Einhorn.
Dividend yield may be the last thing you think of when someone mentions IPOs. But with bond yields so pathetic, income investors in particular are turning to stocks for yield. And the IPO market is obliging.
The broker dealer and investment bank RCS Capital -- the symbol will be RCAP -- will pay a yield of about 14% after it rolls out as an IPO, says Einhorn, at Renaissance Capital. The deal prices during the week of May 27, and it should begin trading shortly after that. RCS Capital specializes in helping investors get exposure to private real estate investment trusts (REITs), which typically deliver high yields by investing in real estate.
Other recent high-yield IPOs include Tallgrass Energy Partners (TEP), which offers natural gas processing and transport infrastructure in the Midwest, and Armada Hoffler Properties (AHH), which develops and operates retail and multifamily properties in the Mid-Atlantic region. Both just came public, and they each pay around a 5% yield.
At the time of publication, Michael Brush did not own or control the shares of any companies mentioned in this column. Brush is the editor of Brush up on Stocks, an investment newsletter.
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