Thursday's heavy-volume market devastation undoubtedly sent many of us thinking back to the autumn of 2008, when stocks were free falling in fast trade. Clearly, caution is the word of the day, but that doesn't mean it's time to completely stop revising your watch list.
I dedicate part of my portfolio to growth stocks, which means some of the names I track, may fall at a faster rate than the broader market. However, it also means they have potential to rise more quickly when a new bull session emerges.
One of the ways I identify investment possibilities is by regularly tracking various categories of stocks. Historically, the ranks of relatively new IPOs have been some of my best winners, so I checked the current status of recently public companies this week. High-profile names including LinkedIn (LNKD), Pandora (P) and Dunkin Brands (DNKN) made strong debuts and grabbed a good amount of media mindshare, but none of these glamour names is among leaders of the pack.
While recent IPOs can offer hope for future sunshine in a dark and gloomy market, it is important to focus on the right stocks, not necessarily the media darlings. As is often the case, the true winners can emerge from the ranks of lesser-known names.
One of the best performing new IPOs has been Arcos Dorados (ARCO), an Argentina-based company that's the world's largest McDonald's (MCD) franchisor. It made its NYSE debut in April at $17. As of Friday, the stock was trading at around $23.
The stock was slammed in Thursday's selloff, resulting in a trip below its 50-day line. It's not unusual for even leading stocks to be dragged down in a dire market, as investors and traders decide cash is a better option than holding equities.
It's worth examining an example from recent market history. Lululemon Athletica (LULU) went public in July 2007, and flew higher through October of that year, when the general market peaked.
The stock, like almost everything else, was a dismal performer until March 2009, when a new rally finally took hold. As most growth investors know by now, Lululemon became one of the market's greatest success stories in 2009, 2010 and even into this year.
Polypore (PPO), athenahealth (ATHN), Ulta Salons (ULTA) and Visa (V) also went public in 2007 or 2008. They all suffered in the broad market beat down and went on to become market leaders.
The point? New companies with energetic management, solid fundamentals and in-demand products or services can often see their stocks soar after a widespread market decline.
A current new issue that has shown strength in a floundering market is nitrogen fertilizer maker CVR Partners (UAN). Despite the market selloff, the stock has held up at its 50-day line.
Wall Street anticipates profit growth of nearly 300% for 2011, although they've pegged a slowdown to 6% earnings growth in 2012. Though the stock might take some short-term hits in market volatility, analysts generally expect agriculture-related plays to show longer-term growth, as its products are needed to help feed an increasing global population. The stock went public in April at $16, and was trading near $24 on Friday.
Another recent IPO that I'm keeping an eye on is GNC Holdings (GNC), which operates and franchises the GNC nutritional supplement stores familiar to mall shoppers throughout America. The stock came public in April at $16. Like many other names, it sliced its 10-week moving average the week ended Sept. 23, although daily downside volume that week was below average. Price losses are never a good thing for bulls, but muted trade as the stock moves lower indicates that traders and investors are not running for the exits en masse.
Sales growth has been trending higher in recent quarters, showing good demand for the retailer's products. It's expected to report yearly earnings of $1.33 per share, a gain of 43% over 2010. Shares were trading between $20 and $21 on Friday, up about 31% from its IPO price.
I don't like to jump into IPOs too soon. As the free-fall of a stock like Pandora illustrates, a much-hyped IPO doesn't necessarily equate to a sure winner. Often, it's the new issues that sneak under the radar that are best positioned for growth over the longer term and will show the steadiest fundamental and technical gains.