Rules of the Game: Playing Recent IPOs

 | Dec 01, 2012 | 2:30 PM EST  | Comments
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Stock quotes in this article:

bsmx

,

tcbi

,

kors

Regular readers may know that I will occasionally update on stocks that have recently had initial public offerings -- which, in my fairly liberal definition, includes companies that have publicly debuted within the past decade or so.

In the past, when I was doing my small-cap radio show, these stocks provided plenty of fodder for trading ideas. I still like the growth potential of small-caps, but I've gravitated away from trading some of these names -- particularly those with higher betas -- and have instead opted to gain exposure via ETFs.

For a single-stock portfolio, I've always favored more liquid large-caps, or at least mid-caps. I generally believe that individual small-caps are best suited to a discretionary trading portfolio, and to constitute no more than 10% of one's total assets.

So where do recent IPOs fit in? While I'm not a fan of smaller, unproven stocks as speculative names, I do like the growth potential of newly public shares -- provided that they have amassed some trading history, and that the companies are showing good earnings and revenue growth. I'm also looking for good liquidity, meaning stocks sport average trading volume of at least 300,000 shares per day, and preferably more.  

Santander Mexico (BSMX), which was spun off from Spain's Banco Santander (SAN) in late September, meets some of my criteria, and appears to have some potential.

At this particular point, the stock has only traded for 10 weeks, and that's a shorter trading history than what I like to see. It seems ready to clear its first consolidation, although it hit resistance Friday at $14.77, the exact price where it had previously stalled Oct. 9.

That is obviously a level to watch. At this juncture, it wouldn't be particularly unusual to see the formation of a classic cup-and-handle pattern. Be forewarned: Such patterns generally are constructive in confirmed bull market -- but, in more volatile market conditions or in downturns, they tend to be much less reliable.

The earnings performance at Santander is not as strong as I'd like to see -- the most recent quarter showed year-over-year growth of 14% to $0.24 per share. However, analysts see 2012 earnings growth of 28% to $0.98 per share. In 2013, that's expected to rise another 16%, to $1.14 per share.

I'm not too enamored with the bank stocks these days, but there are often exceptions to general rules, and Santander Mexico is currently an exception that shows some promise. There are also some U.S. regional banks, such as Texas Capital Bank (TCBI), that have been good performers and have potential to continue rallying.

Santander Mexico, with market capitalization of $19.8 billion, is one of only a few large-cap recent IPOs.  Another stock I've been tracking for most of the year is Michael Kors (KORS). This one is perched just above the $10 billion market-cap level, making it a small large-cap (if there is such a thing). The stock went public at $20 in December 2011.

Michael Kors is a volatile stock, with a beta of 1.15. It has been subject to some sudden price swings, both to the upside and to the downside. But it continues to rise to the top of my IPO scan, based on its combination of fundamental and technical strength.

Although the stock is now consolidating, it remains a good watch list candidate, based on its standing with institutional owners and on its fundamental performance. Earnings grew at rates of 96% or more in the past seven quarters. When 2012 wraps up, analysts see full-year profit of $1.54 per share, a gain of 77%. In 2013 they expect another 29% gain to $1.99 per share.

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