Consider Under-the-Radar IPOs

 | Mar 30, 2012 | 4:00 PM EDT
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With this week's high-profile public-market debuts of Annie's (BNNY), Vocera Communications (VCRA), Millennial Media MM and CafePress (PRSS), among others, it seemed like a good time to review some under-the-radar initial public offerings (IPOs) that have scored big gains in recent months.

As I run my daily scans of top-performing stocks, recent IPOs -- and by recent, I am referring to companies that began trading public in the past decade or so -- tend to make up a large percentage of the names that pop up. In fact, stocks that went public in the past five years are often the bulk of the names on any given growth screen.

One of my key tenets of IPO buying is this: Never try to jump into a new issue based on media hype. It's quite normal for a new stock to see an early pop, and then pull into a consolidation while early buyers flip shares. After that, new buyers who have conviction in the stock, but are seeking a better value, jump in and send the shares higher again.

This week's trading in Millennial Media offers an example of why I prefer to give a stock some room after the IPO. The shares went public at $13, and closed at $25 in their first day of trading. That was on Thursday. On Friday, the stock was trading at around $23 mid-session. It's possible that some investors who were swept up in media excitement about the stock were also caught in the subsequent downdraft.

A number of companies that have gone public within the past year have flashed technical buy points after pullbacks -- and have then gone on to be price winners. I've written about many of these previously, including Michael Kors (KORS), Francesca's Holdings (FRAN) and Ubiquiti Networks (UBNT).

Some, including Francesca's and Ubiquiti, don't get much love from the media when they debut. But those are two examples of current small-cap growth leaders.

Another relatively unknown recent IPO is Spirit Airlines (SAVE). It has been one of the best price performers in an industry that's mostly been struggling to gain altitude. The discount airline went public at $12 in May 2011, and is currently hovering just below its March 14 all-time high of $20.66. The stock got solid support at its 10-week average in the past few weeks, and volume this past week increased as the stock trended higher.

It's in a technical buy range at the moment, although as with all small-caps, it's wise to use some caution and be ready to exit quickly if the stock falls sharply below your purchase price. The stock has a beta of 1.17, indicating its volatile nature. In cases like this, I set stops to about 8% below my purchase price, because it's not unusual to see a volatile stock fall to that level, and then begin rallying again.

Another recent IPO that shows up on my screens, if not in mainstream media reporting, is Thermon Group Holdings (THR). The company is in a decidedly non-glamorous industry, meaning there aren't scores of business reporters tracking its every move. It makes external heat sources for pipes and other industrial and transportation gear, so it's not exactly the latest social media play for hipsters.

In addition, Thermon, which has a market cap of $620 million and moves 138,000 shares a day, gets little Wall Street analyst attention. That's quite typical of companies of this size, regardless of the industry. Smaller firms don't go back to the equity or debt markets to raise financing as often as their larger peers, so they are not top-of-mind for many of the big banks.

So those are some reasons why this may be an unfamiliar name to many. However, the chart is currently shouting, "Look at me!" Thermon went public in May 2011, and then underwent the common post-IPO correction. It cleared that consolidation with a huge price move -– although in lower volume -- in July of last year.

So far in 2012, Thermon is up 17.59%. Its current chart action -- the most important indicator of whether a stock is a potential buy or watch-list candidate -- is showing bullish characteristics. It has been getting healthy 10-week support, a sign that its institutional owners are holding shares, or even quietly adding to their positions on the dip.

The stock is consolidating below its March 1 all-time high of $21.53. Because it is small and has fairly scant institutional ownership, it's also wise to be vigilant for sudden price swings in Thermon, and be prepared to cut losses quickly.

Thermon is working on a possible base, which would be its third such consolidation since its big move in July. A series of consolidations without undercutting prior lows could signal that a stock's rally is getting long in the tooth, so that's something to watch for in Thermon.

In addition -- and this applies to any stock purchase right now -- with the market under some general selling pressure, any individual stock could be subject to some price declines.

Even with those caveats, it's generally a good idea to follow recent IPOs as they develop their trading histories. These newer stocks are often among the market's best performers at any given time, and can reward traders and investors who are willing to look beyond the obvious, well-publicized names.

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