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It's not exactly 1999 redux, but companies are still lining up to test the waters of the initial public offering market even amid choppy weather for major equity indexes (see BusinessWeek.com, 6/14/06, "IPOs Keep Rolling On"). Despite the difficulties involved, some outfits have even made dramatic entrances. The latest example: the June 28 debut of J. Crew (JCG). The apparel retailer closed its first day of trading at $25.55, up more than 25% from its $20 pricing, which was at the high end of the company's forecasted range.
But while investors may be mad for the purveyor of preppy gear like chinos and cotton sweaters, they may not react as strongly to other upcoming offerings, especially as the broader equity markets continue to wobble (see BusinessWeek.com, 6/14/06, "A Summer Slump for Stocks"). In a market environment where big Wall Street firms can bring the likes of Vonage (VG) to the starting gate with a straight face, investors have to be selective.
Given the current climate, Reena Aggarwal, a professor of finance at Georgetown University, says that in addition to traditional factors like strong financials, "brand recognition is more valuable than normal." That probably helped J. Crew's debut. It's a position also supported by MasterCard's (MA) strong performance since its late May offering.
What lies ahead? There are some big deals on the horizon, but not all of them will be as well received as J. Crew. With that in mind, Five for the Money takes a look at stocks in the IPO pipeline that could beat the odds. (Be sure to check back next week for our look at five IPOs investors should avoid.)
As always, investors should exercise caution when considering these fledglings. The early bird doesn't always catch the worm.
1. Hawkeye Renewables With plenty of interest in renewable fuels, ethanol producer Hawkeye Renewables could show a nice pop during its upcoming offering. Earlier this month, peer VeraSun Energy (VSE) showed an impressive first-day gain, closing above $30 after initially pricing at $23. It has subsequently fallen but remains above the offering price. And on June 28, another ethanol group, Aventine Renewable Energy, raised the estimated range of its imminent IPO to $40-$43, from $37-$41, according to IPOhome.com. Not bad for a largely experimental industry in a tricky stock market.
There's no shortage of controversy surrounding ethanol investing (see BusinessWeek.com, 6/12/06, "Should You Bet on Ethanol?"), but there's no denying investor interest in the group. Georgetown's Aggarwal says it's a good time for ethanol and "companies involved in alternate solutions to the gas issue."
Hawkeye is the third-largest ethanol producer in the U.S. after VeraSun and agro-giant Archer Daniels Midland (ADM). Like its rivals, it has benefited from increased demand for ethanol and the concurrent price spikes. In 2005 it earned a net income of $8.6 million on revenues of $89.1 million. In the first quarter of 2006 its net income was $6.8 million on revenues of $27.8 million.
2. Stanley No relation to the hand-tool giant, Stanley is an info-tech services company with a deep-pocketed customer, the U.S. Government. Its services include systems integration, designed to increase the interoperability of different business systems, and business process outsourcing.
According to the group's Securities & Exchange Commission filing, at the end of May it had 200 active contracts with 38 federal agencies, though most of Stanley's revenues come from the Defense Dept. The company, which was founded in 1966, believes its ties to the government will continue to prove beneficial.
For the year ended Mar. 31, the profitable company pulled down $284.8 million in revenues, up only slightly from 2005 but 59% more than 2004. It sees ample opportunities to grow as defense spending and government outsourcing increase.
3. Osiris Therapeutics Biotech IPOs combine two of the riskiest investment types out there. The problem is that they must advance their products through a long, expensive, and unpredictable approval process before they start making serious money. However, when they succeed, big gains are often in store. And investors with a taste for risk might do well to bet on Osiris.
Somewhat unusual for a small biotech going public, Osiris already markets a product, Osteocel, a stem cell-based treatment used to regenerate bone tissue. The company is also developing three new drug candidates. The most advanced of these is Prochymal, which is beginning a late-stage clinical trial to treat steroid-refractory graft-versus-host disease, an immune disorder that affects bone-marrow transplant patients.
4. GMARKET Bidding on Wall Street could also be fierce for the South Korean online marketplace GMARKET. Tom Taulli, an adjunct professor at the University of Southern California who has written on IPOs, says the company has "some pizzazz to it because it's an e-commerce play in an emerging market." Korea is also a worldwide leader in terms of broadband Internet use. The country's love of e-commerce is reflected in GMARKET's numbers. Revenue blasted up from 3.7 billion Korean won in 2003, to 70.3 billion won (about $72 million) in 2005, when it had a net income of $5.2 million.
The company also has some formidable backers. Shortly after GMARKET filed to trade on the Nasdaq, Internet powerhouse Yahoo (YHOO) said it had agreed to buy about 10% of the company. And Goldman Sachs International (GS) is the lead underwriter for the offering.
5. Go Daddy With its wacky corporate title and buzz-building advertising campaigns, Internet domain-name registrar and Web hosting company Go Daddy sounds a bit like a concern that would go public in 1999 and close its first day of trading worth as much as General Motors (GM), only to go out of business when the bubble burst. (Yes, this was the outfit that ran the tacky ad involving an underdressed model in front of a Congressional panel a couple of Super Bowls ago.)
But Go Daddy, founded in 1997, has outlasted its Web-bubble peers, and its IPO might be worth a shot for those with a tolerance for risk. The company has demonstrated an impressive ability to boost revenue. It pulled in $139.8 million in 2005, up from $73 million in 2004 and $39.2 million in 2003. And it boasts 2.9 million customers.
Even so, this outfit might not be a suitable father figure for many investors. It still hasn't turned a profit—and its filing doesn't specify a date for when it will. Now that sounds a bit like 1999.
Halperin is a reporter for BusinessWeek.com in New York
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