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Ip Os: Sifting Through The Wreckage


BusinessWeek Investor -- The Barker Portfolio

IPOs: Sifting Through the Wreckage

More than nutty net outfits exploited the IPO boom

Are you one of the smart investors who resisted the temptations of the late great IPO acid trip? Then congratulate yourself--you probably still have the wherewithal to shop in a section of the stock market where the performances of such recent initial public offerings as eMachines (EEEE) (down 97%) and Pets.com (IPET) (down 99%) have changed the vibe from Haight-Ashbury 1967 to something more like Manson Family 1969.

Even if you escaped harm, the scene around you may seem confusing. More than 1,000 new issues have started trading since Nov. 13, 1998, when the 606% first-day pop in shares of Web-site operator Theglobe.com (TGLO) (now down 97%) got the party going. The frenzy peaked last February, when even an average IPO soared more than 116% on its first day of trading, according to Jay Ritter, a University of Florida finance professor and leading IPO expert (Web site: http://bear.cba.ufl.edu/ritter/). By November, that average had collapsed to under 16%--near its level before Theglobe.com started spinning.

To sort through that morning-after mess, I set out to create a list of stocks that began trading in the last year and may now be worth deeper research as potential investments. Using Morningstar Principia Pro for Stocks, a database of more than 7,000 stocks, I focused on the fundamentally strong: companies with current market values of at least $1 billion, with operations that have been generating cash, and with fair expectations of turning a bottom-line profit in the coming year.

Those few criteria quickly shortened the list to just 14 stocks (table). Representing 10 industries, the surprisingly mixed group undercuts the notion that nutty Net outfits alone exploited the IPO boom. Through Nov. 30, just 33 of 317 Internet IPOs from 1999 and 2000 were still trading above their initial price. By contrast, half of my list's 14 stocks are still showing gains.FOR EVERY BUDGET. The pricey ones are led by telecom-network software maker Ulticom (ULCM), still up 138% from its April debut and trading at 94 times the 33 cents per share analysts expect it to earn in the fiscal year ending January 2002. Also expensive are chipmaker Marvell Technology (MRVL) (58 times future earnings), network software producer Ixia (XXIA) (46 times), and Hotel Reservations Network (ROOM), an online consolidator of hotel rooms that is trading at 33 times its estimated 2001 net. While Palm (PALM), the leader in handheld computing, is way below its IPO price, it still trades at 135 times future profit.

Less racy tech names include APW (APW), a spin-off of longtime electronics manufacturer Applied Power. It's going for just 14 times estimated earnings for fiscal 2001, ending in August. Also among the more modestly priced are semiconductor makers Integrated Circuit Systems (ICST) (18 times) and Intersil (ISIL) (21 times). Both Intersil and APW are trading under their initial prices. Not so the list's two independent electric utilities, NRG Energy (NRG) and Southern Energy (SOE). With power in tight supply to such spots as California, these companies are commanding more than 22 times future net.

As a cheapskate, I'm naturally most intrigued by four others that are trading way below their initial prices: Avaya (AV), Energizer (ENR), TyCom (TCM) (offspring, respectively, of Lucent, Ralston, and Tyco), and Genencor International (GCOR), a biotech venture set up back in 1982 by Genentech (DNA) and Corning (GLW). Does that make these--or the other 10--surefire winners? No way. But they've already suffered plenty, in part simply because they're new issues.

If the IPO market remains weak, high-profile deals pending from Prudential Insurance, Kraft Foods, and Loudcloud, the Internet company headed by Netscape founder Marc Andreessen, may wind up getting priced at less than top dollar--offering buyers a real opportunity. The main thing to remember is this: IPO is no longer synonymous with LSD.Questions? Comments? Send an e-mail to barkerportfolio@businessweek.com or fax (321) 728-1711By Robert BarkerReturn to top


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