April 19th, 2008

IPO’s in the IBD 100 List

Once you become more comfortable that the clouds over the stock market might be breaking up and the sun may begin shinning again (a fitting metaphor with Spring busting out all over), the next step is narrowing the universe of 7000+ individual stocks and narrowing the range down to the 20-30 or so interesting investment candidates that I define as “stocks with positive price momentum”.

I’ve written recently about two of the four filtering methods I use, Industry Groups and New Highs. But there is a third that always yields a bunch of stocks with powerful momentum drives and those are tested and proven, relatively new IPO’s.

Take, for example, this Friday’s list of the IBD 100 top-rated stocks. Of the current 100, fully 34% become publicly traded on one of the US exchanges starting in 2000:

Many of these stocks have been on the list before, many have been on the list for some time. And there’s no telling how long they will remain on the list. But there’s a clear pattern here. IBD identifies IPO’s and evaluates them according to their various CANSLIM criteria. Hopefully, they flags them for you early enough for you to buy in before the herd hasn’t push the price too high.

Similar to the case of Industry Groups, I want to try to anticipate which IPO will be a winner before it’s published in the paper and mentioned by talking heads all over the airwaves. I do that by creating a watchlist of IPO’s for each year (I now have 8 watchlists starting in 2000). After about 60-90 days (and sometimes it may take a couple of years as the IPO creates a base), if an recent IPO breaks convincingly into New Highs territory and the Market climate is favorable, I identify the stock as one that worthy of a minimal investment. Additional shares will be added if it continues to perform.

There are many examples but one that clearly tells this story is Psychiatric Solutions (PSYS). Unfortunately, it’s only one that I wish I’d owned:

As a matter of information, PSYS was in the IBD 100 for 32 of the 133 weeks between April 1, 2005 and December 31, 2007 (that’s when my records of IBD 100 stocks began). During the month of April, 2005 it was ranked between 3rd and 6th; and then it fell off the list and reappearing off an on starting in June, 2005 in rankings between 15 and 75.

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