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Bargains Among Busted IPOs


One summer morning, the sun dawned wicked hot over Wall Street, where the watchword was Baidu.com (). If Baidu meant nothing to you, oh how out of it you were. Billed as the Google () of China, Baidu went public at 27, opened that day at 66 and swiftly hit 151. Lately it goes for 80. Baidu, it seems, must be Mandarin for Inefficient Market Hypothesis.

Managed by the Street's sharpest marketers, stocks sold in initial public offerings can take years to settle into some facsimile of rational trading. Then, after the deal hype wears off, you might stand a reasonable chance of finding a value in so-called busted IPOs, or stocks that have sunk below their initial prices. As the volume of IPOs has picked up -- 216 in 2004, plus 126 more through Sept. 19, according to Renaissance Capital's IPOHome.com -- I've begun to wonder: Are there busted IPOs worth buying?

So I asked two data outfits, Standard & Poor's () Capital IQ unit and Morningstar (), to help me come up with a list of possibilities. We restricted the search to U.S. companies that have gone public since Jan. 1, 2002, and then I further limited it to companies that now have at least $1 billion in market value. Finally, I excluded those without net profits and trading at a multiple of enterprise value (market capitalization plus net debt) to EBITDA (earnings before interest, taxes, depreciation, and amortization) of nine or more. If the criteria are arbitrary, in the end I had four very different companies.

-- ADESA (). This is the Sotheby's () of used and beaten-up cars. It collects fees by matching sellers with buyers, both online and in person at 53 used-vehicle auction sites and an additional 32 salvage locations across North America. In the June quarter, ADESA moved 494,482 vehicles, collecting an average of $436 on each, a 6% gain from the average take in 2004's June quarter. Through the first half, total revenue rose 3%, to $492 million, and net income increased 15%, to $71 million. Based in Carmel, Ind., ADESA also finances used-car dealers' inventories, which contributes 12% of total revenue.

-- ADVANCE AMERICA, CASH ADVANCE CENTERS. This Spartanburg (S.C.) company exploits an unhappy growth phenomenon: "payday lending," or unsecured, short-term but high-cost loans to people who are strapped for cash. The average loan runs $334. Naturally, this chain of 2,520 lending offices in 35 states is defensive about being seen as a loan shark and is widely attacked in courts and statehouses by consumer groups and rival lenders. In Georgia it was forced to give up and shut down. Just the same, it keeps growing, and the stock comes with a 2.8% dividend yield.

-- AMIS HOLDINGS (). A maker of specialty semiconductors, AMIS supplies chips for a wide variety of products, from autos to cardiac pacemakers. Based in Pocatello, Idaho, AMIS in September closed on a $138 million deal for Flextronics International's () semiconductor unit, which at current rates might add $75 million or so to its $493 million in annual revenues. It expects the new addition to expand sales in Asia, which now come to just 18% of the total, and hopes also soon to be named one of Flextronics' preferred suppliers. Chief Financial Officer David Henry told me AMIS is intent on lowering its debt, a relatively high 54% of total capital.

-- HUNTSMAN (). Netting nearly $1.5 billion on its February IPO, this Salt Lake City chemical giant (2004 revenues, $11.5 billion) so far is the year's biggest new issue. Sadly for investors, it has been a dog, with shares off 24% from the IPO. Worth noting, however, is that Huntsman's fall is about in line with such global rivals as Dow Chemical () and DuPont (). Higher crude oil and natural gas prices are hurting -- and will continue to hurt -- until the chemical companies can start recouping higher costs via price hikes. Meantime, shares of Huntsman trade at multiples lower than better-known peers.

All these stocks are unlikely to rebound soon. But to me they beat hoping to catch Baidu's next manic swing.

By Robert Barker


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