Investing April 10, 2008, 5:00PM EST

Picking Gems Out of the IPO Junk Pile

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Alex Robbins

Blackstone's fourth-quarter profit tumbled 89% after a bond-insurance-related write-off, and Fortress posted a net loss because of declining hedge fund fees.

Both may have the capital to weather the dark days of 2008 and resume dealmaking down the road. "Once liquidity improves, it should help them book more profits," says hedge fund manager Zachary Scheidt of Stearman Capital in Atlanta. His fund, which focuses on newly public companies, owns shares in both companies.

VOLATILE TECH

Technology IPOs, with their promise of being the next big thing, tend to be the most volatile. At one end of the spectrum, online auction site MercadoLibre gained 140%, while media network service Limelight Networks is down 78%.

Finding values in busted tech IPOs means, again, looking for real businesses with current profits. One company that suffered from a hot trend cooling was MetroPCS (PCS). Before going public, the cellular carrier had almost doubled its customer base in the prior three years, thanks to innovative pay-as-you-go billing plans that don't require two-year contracts. After going public last April at 23 a share, the stock peaked at over 40 in July. But a failed attempt to acquire a competitor, and slowing customer growth because of the economic downturn, pushed shares to 15 by the end of the year. They've since popped up to 18. Even with the sluggish economy, MetroPCS is expected to add 1.5 million subscribers in 2008 and use cash from operations to pay down debt.

Another promising tech IPO is Qimonda (QI), which makes computer memory chips. It was spun out of Infineon Technologies (IFX) in an August, 2006, IPO at 13 a share but now trades at just over 4. Revenue has dropped as prices for memory chips collapsed in a glut of supply last year. Still, analysts at Morningstar (MORN) say the company is worth more than twice its current price as the industry will work off the oversupply through the next year.

Tilson and other investors warn that not every busted IPO is a bargain in waiting. Many are companies that had shaky business models or weak profits to begin with. One company Tilson points to is Clearwire, a wireless broadband provider backed by cellular pioneer Craig McCaw. It raised $600million in an IPO last March. Clearwire's net loss jumped to $727million last year from $284 million in 2006, dwarfing a $50million increase in revenue. Its shares have lost 44%. Clearwire declined to comment. "Focus on companies that can be valued on a multiple of real earnings with real businesses," Tilson says, "rather than speculating on companies that never should have gone public."

Pressman is a correspondent in BusinessWeek's Boston bureau .

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