A vibrant initial-public-offering market could get even more vibrant in 2012, if recent pricing activity is any indication.
According to Renaissance Capital, last week's pricings of Acquity Group (ticker symbol AQ) and Edgen Group (EDG) put 2012 on a record pace for activity. 57 new issues have priced through April, the most since 2000. Year to date, U.S. IPOs have raised $9.5 billion and produced an average return of 26%.
This week, six more names are scheduled to price, including EverBank (EVER), Pacific Coast Oil (ROYT), PetroLogistics (PDH), Supernus Pharmaceuticals (SUPN), The Carlyle Group (CG) and Tilly's (TLYS).
While the IPO market can present great opportunities, it's good to have a buying strategy in place. Some IPOs are worth owning. while others are not. I tend to favor IPO names with a proven track record of earnings and sales growth -- and, in recent months, the market has seen no shortage of new issues with great sales growth but no earnings.
Some IPOs open with a lot of fanfare despite questionable fundamentals at best. I tend to avoid the hoopla. In November, for example, Groupon (GRPN) and Angie's List (ANGI) had successful debuts but their price performance since then has left a lot to be desired. Both firms have shown strong sales growth in recent quarters, but Angie's List is still losing money. Groupon, meanwhile, is supposed to turn its first annual profit this year, although it's fallen out of Wall Street's favor due to several financial reporting miscues. In early April, the company revised fourth-quarter earnings lower because it didn't set enough money aside for customer refunds.
Recent new issue Tumi (TUMI) is interesting, but I can't fully embrace it here despite a solid debut on April 19 at $18. Shares closed Monday at $25.47. Tumi turned its first annual profit in 2010, but I don't like the fact that sales growth has been decelerating lately, from 31% in the third quarter of 2011 to 19% in the fourth quarter. This isn't a deal breaker by any means, but it's normally good for a sales growth in a new issue to be accelerating, and not slowing.
Also, Tumi has only been trading for eight days -- not nearly enough time to tell if institutional investors are truly interested in owning the stock. A key rule I follow when investing in IPOs is to wait at least four to five weeks of trading before considering a buy. That's usually enough time for an IPO to develop a trading personality and develop a solid first-stage base. Early-stage base breakouts, fueled by institutional buying, can yield big gains.
The first rule, then, is that you should target IPOs that are profitable with a proven track record of earnings and sales growth. Two recent IPOs on my radar currently that fit the bill are Francesca's Holdings (FRAN) and Michael Kors (KORS).
After a powerful breakout in mid-March, Francesca's has been firming up at its 10-week moving average, showing good supporting action. It operates a chain of retail boutiques offering apparel, jewelry, accessories and gifts to an 18-to-35 female demographic. It's a fast-growing company with great execution so far, and is still in the early stages of expansion.
Big buyers were in the stock Monday as shares rose 5.4% to $31.35 in above-average volume. The stock is buyable at current levels, but I wouldn't be afraid to cut losses short if it broke convincingly below its 10-week moving average, currently at $29.32. I'm not expecting it to happen, but it could if selling pressure starts to build in the broad market again.
Meanwhile, Michael Kors continues to set up for another move higher, but it has more work to do before an entry point is seen. The company specializes in "affordable luxury." Judging by recent earnings and sales growth, it has a loyal following.
The company went public in December at $20. In recent days, Michael Kors has made a convincing case that it has hit bottom, but the stock is not buyable yet. I'll be patient here and wait for it to form a good base. I'd like to see more signs of accumulation in the stock -- that is, heavy-volume gains. Climbs on big volume generally strengthen a stock's foundation. A potential base breakout above $50.67 could be in the cards, but the stock still has to prove itself more.
Kors is a high-multiple stock, but it's worthy of a premium valuation because it's growing quickly. In February, fiscal third-quarter earnings jumped 87% from a year earlier, while sales grew 68% to $373.6 million. Same-store sales in the quarter rose an impressive 38%. The company's next earnings report isn't due until June 12. At present, the consensus estimate calls for profit of $0.14 a share, up 56% from a year earlier, with sales projected up 50% to $359.1 million. Shares closed Monday at $45.67, down 0.5%.
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