May 28th, 2007

Life Cycle Investing: Winning IPOs Class of 2006

I described here earlier how I integrate Industry Group and various IBD lists (IBD 100, New America, Stocks on the Move) into my Telechart activity. Recently, however, I noticed for the first time the table of recent IPO’s printed several times a week in Investors Business Daily. I’ve rarely paid much attention to that information since, long ago, I decided to avoid any involvement in recent IPO’s because they lacked prior price data and, consequently, no interesting or meaningful charts to speak of. However, several diverse things recently piqued my curiosity.

IBD often includes several recent IPO’s in their New America and IBD 100 lists. Additionally, several stocks consistently hitting the New Highs list and their list of “Leading Stocks” are recent IPO’s. Take, for example, the following 24 (nearly 20% of a total 131) from last year’s 2006 Class of IPO’s (click on symbol to see chart);

  • AmTrust Financial Services (AFSI)
  • American Railroad Industries (ARII)
  • Allied World Assurance Holdings (AWH)
  • Buckeye Group Holdings (BGH)
  • Chipolte Mexican Grill (CMG)
  • Capella Education Company (CPLA)
  • Crocs (CROX)
  • Danaos Corp (DAC)
  • New Orient Edu and Tech (EDU)
  • Energy Metals Corp (EMU)
  • Energy Transfer Equity (ETE)
  • Hansen Medical (HNSN)
  • Houston Wire and Cable (HWCC)
  • Mastercard (MA)
  • NTELOS Holdings (NTLS)
  • Omrix Biopharmaceuticals (OMRI)
  • Omniture (OMTR)
  • Penson Worldwide (PNSN)
  • Synchronoss Technologies (SNCR)
  • Systems Xcellence (SXCI)
  • Volcano Corp (VOLC)
  • Verigy (VRGY)
  • Winn-Dixie Stores (WINN)
  • Western Refining (WNR)

This is an unbelievable list of performers. Had you bought any of them some time early in their listed history, and had the stomach to hold on to them since, you would have seen a 100%+ ride over less than 6 months in most of them! However, Forbes Magazine recently ran an article in their Investment Guide issue entitled “Ground-Floor Stocks.” They concluded that:

“The U.S. new-issues market is on a pace to have one of its quietest years of the past decade. That’s probably good news for investors. When the fish aren’t biting, Wall Street underwriters have to be choosy. Only the strongest prospects make it to market…..Although there are several exceptions to the rule–and although 2007 offerings are off to a terrible start–the general pattern is that lean years, like 2001 and 2002, deliver excellent returns. Busy years for the new-issues docket are bad years in which to speculate.”

The following table accompanies the article:

There seems to be a conflict. Are there indicators that help separate the smaller percentage of prospective winners from the larger pool of losers? Are there rules for timing these investments (when to buy and when to sell)? And has this experience been true for IPO’s in each of the past several years. It seems that if one were able to buy winners like these and avoid and/or limit losses on the losers, your portfolio could grow, so fast, that there wouldn’t be enough stock available to satiate your appetite for them.

(to be continued)

Subscribe below or click here to learn more about help for navigating turbulent markets.