In recent weeks, a handful of upcoming initial public offerings (IPOs) have caught my attention. IPOs are hot again, fueled by recent public issues that exceeded investors’ expectations, including Google (GOOG), Morningstar (MORN), and Baidu.com (BIDU). While some IPOs have been unsuccessful, notably Caribou Coffee (CBOU), a stock I own, many have been very successful. Last week, Chipotle (CMG), a Mexican Grill chain spun off from McDonald’s, doubled in price on the first day of trading. Generally speaking, companies with name recognition such as Google and companies generating buzz such as Baidu.com that have gone public have been most successful since the IPO market began to heat up in 2004.
My interest in IPOs began when I purchased shares of Google at IPO. I sold and turned a profit on Google long before its share price rose into the stratosphere. I also participated in the Morningstar IPO and still own shares. Generally, I have had more success at profiting from IPOs when I am able to buy shares when they go public. I typically purchase IPO shares through Dutch auction IPO, a system that allows small investors to participate in public offerings. W.R. Hambrecht’s OpenIPO Program is an excellent way to get involved in IPOs.
IPOs are inherently volatile. A company’s initial offering price is sometimes too inflated or too low, meaning that the price could suffer a severe correction as investors react to announcements and speculation about the newly-public company. Participating in IPOs are not for the timid investor. Be prepared to win some, lose many if you participate in IPOs. The hope is that IPO winners will far outperform the losers, helping you earn an significant return.
I’ve noticed three measures of successful IPOs since I first began participating in IPOs. These are general observations and are not applicable in all cases.
- Companies with a healthy balance sheet generally perform better that money losers when they go public. For example, Google is a cash cow. In contrast, Traffic.com (TFRC) has suffered from huge losses, and its growth rate is meager. Shares of TFRC were available through Dutch auction IPO, but the IPO underwhelmed. It currently trades at its IPO price.
- Companies with name-brand recognition or a very hot product or service generally perform well. Caribou Coffee is the exception. Google, Morningstar, and Chipotle are all name-brand stocks. It’s easy for a these kinds of companies to attract a herd of potential investors.
- Hot IPOs tend to move from sector to sector. Last year, technology IPOs were hot. Right now, consumer companies are hot. Tomorrow, who knows what investors will prefer–perhaps energy IPOs–as the NYSE predicts will happen. Or the IPO market could cool down. If I could tell you which sector will be hot, I would be a Wall Street guru. I can name some IPOs I think have the potential to be very successful.
Here are the upcoming IPOs I am currently monitoring:
- Burger King: Yes, the Home of the Whopper is going public for the first time in its history. This burger orphan was privately owned until it was bought by Pillsbury, then it was sold to Grand Met, which was bought out by Diageo, the liquor giant, which then sold Burger King to private equity firms, including Texas Pacific Group and Bain Capital. It’s a sad tale of woe that contributed to BK’s perenniel underperformance. Texas Pacific Group and Bain Capital have significantly improved BK’s business, and now it is expected to the biggest restaurant IPO in history. I’m bullish on this one, because Burger King has done a major turnaround. The problem is, many other investors also know this and will be waiting to gobble up shares on the first day of trading. I recommend waiting until BK’s share price corrects after the first week of trading and then consider buying shares. If you can get in on the pre-IPO action, by all means…buy shares!
- MasterCard: The world’s largest credit card company is going public. Own a piece of Americans’ credit card debt by picking up shares of this omnipresent plastic company. This IPO was delayed until next spring because CEO Bob Selander is battling prostate cancer. If and when MasterCard does go public, buy shares immediately. Along with Burger King, this will be by far the hottest IPO of the year. Even if shares go up substantially, I recommend buying into this IPO as soon as possible.
- Tim Hortons: Canada’s favorite restaurant chain and doughnut maker is being partially spun off by Wendy’s International. Wendy’s is planning to sell 15%-18% of the company to investors. Although not as well known as Burger King, Tim Hortons is nonetheless very attractive as a public company. Tim Hortons has great expansion opportunities in the United States and overseas. As long as restaurant IPOs remain hot, I recommend buying shares. You could bid on this at day one and still do well. I do not foresee that shares will double or triple on the first day of trading.
- MGA: The maker of Bratz Dolls, one of the hottest girls’ toys, plans to go public and use the proceeds to diversify beyond Bratz Dolls. While it’s unclear whether it can extend the Bratz franchise beyond dolls, MGA is a feisty company that took on Mattel and Hasbro head on and thrived. I think MGA will do well as public company and recommend buying shares at IPO or soon thereafter, although I would not recommend buying shares immediately if the price doubles or triples on the first day of trading.
- Vonage: Vonage is a well-known Internet telephony player. Some analysts speculate that Vonage is using the IPO as a bargaining chip in buyout negotiations with telecommunications firms and that it may never IPO. Many do not believe that Vonage can survive as a standalone company and effectively compete with the telecom giants, including Verizon, SBC, and Ebay. Ebay, you say? Yes, Ebay bought out Vonage’s main rival, Skype, last year. If Vonage does go public, it would be worthwhile to pick up a few shares. If you own Ebay (and by fiat, Skype), do not purchase Vonage shares or you will own competing equities. By picking up a few shares, you won’t miss out on Vonage’s tremendous potential, and you won’t get burned if it fails as a standalone company. I suspect that Vonage will go public and remain public for a year or two until it is bought out by a major telecom player.