Rules of the Game: Newly Public Stocks for the New Year

 | Dec 27, 2012 | 11:00 AM EST
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The other day, I wrote about doing a year-end portfolio cleaning to eliminate possible sector or geographic duplications. The next step, of course, is to update your watch list with some possible buys for the new year.

If you've been following my columns for a while, you know that I like to track recent IPOs. Newly public companies with strong earnings and revenue growth are generally among the market's fastest price-growers.

On Wednesday, I ran a scan of the most profitable new companies -- "new" meaning companies that went public in the past two years.

Among the larger new companies that are the most profitable are two that are hardly secrets: LinkedIn (LNKD) and Michael Kors (KORS).

I've written about each of these stocks numerous times over the past year, and I still like their potential. Both are consolidating right now below prior highs, trading above their 10-week moving averages.

Analysts expect Kors to earn $1.57 per share in 2013, up 80% from this year. Earnings grew at rates of 87% or more in each of the past six quarters.

LinkedIn, meanwhile, is expected to wrap up this year with earnings of $0.72 per share, a year-over-year gain of 106%. In 2013, it's seen as growing by another 78%, to $1.28 per share. The company's earnings grew at a rate of 45% or more in seven of the past eight quarters.

A 2011 IPO that has boasted strong earnings growth is the fertilizer maker Rentech Nitrogen Partners (RNF). Income increased by 60% or more during each quarter of the past two years.

When the company reports this year, it's expected to wrap up with per-share earnings of $3, a gain of 186%. That's seen dropping to 10% growth in 2013. However, that doesn't necessarily portend a slowdown in price appreciation, as long as the company meets or beats views (or even if revenue views look promising).

Rentech advanced 130% in 2012. It's currently consolidating below its Nov. 2 high of $41.15. It closed Wednesday at $37.69, 0.6% beneath its 50-day average.

This consolidation is constructive, thus far. The stock is holding nicely above its Nov. 15 intermediate low of $34.50. After rallying quickly to a high after its IPO, a breather could set it up for fresh gains.

Be aware: Rentech is a small stock, with a market cap of $1.46 billion. It trades about 293,000 shares per day, about the level of liquidity you'd expect with that market cap. The stock has a beta of 1.12, and a glance at its chart is all you need to see its propensity for volatility.

In other words, this is not the kind of stock to make the centerpiece of your investment strategy. But as a small position, it could turbo-charge a portfolio that's built around plain-vanilla indexed ETFs and some large- and mid-cap stocks.

In addition, be aware that disappointing guidance or some other bad news often hurts a smaller stock more than a larger name, in terms of percentage decline. Keep an eye on moving-average support when making a buy in one of these smaller, newer stocks.

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