Investing in IPOs: There are still some IPOs in play

Investing in IPOs: Upcoming IPOs pack plenty of profits

Today's Financial News - Posted August 9, 2008

Thought the time for investing in IPOs had passed? Not at all! Lou Basenese of Alpha Intelligence Alert has identified some upcoming public offerings that you will want to know about. Watch the video now.

by Laura Cadden, Todays Financial News

Baltimore — (TFN):

Laura Cadden: There’s been a distinct lack of exciting IPOs in 2008. In the second quarter, only a few companies even bothered to go public. Most listings of companies intending initial public offerings have “TBA” as their plan issue date. You could say that bear markets are bad for IPOs, but my guest today, Lou Basenese of Alpha Intelligence Alert has a different take entirely.

So Lou, I was intrigued by your viewpoint about the slow down of IPO activity. You think it’s actually to the advantage of individual investors?

Lou Basenese: Absolutely. I think it plays perfectly into our hands and here’s the reason why… There are two main points. The first is because the IPO slow down is so prevalent, only the high quality deals are getting out the door. So the less quality offerings aren’t even making it to the underwriters’ desk. So you get high quality.

At the same time, the underwriters know that investors’ appetite for risk is diminished. So the way that they’re going to get these high quality deals out the door is to offer them at a discount.

So in my mind getting an asset that’s high quality at a discount… it doesn’t get much better than that.

Laura Cadden: It certainly doesn’t. But yet a lot of investors I’ve spoken with are really not eager to invest in equity right now. And a lot of the financial institutions in the United States are taking a very cautious stance. Where do you see the capital coming from to sponsor these IPOs?

Lou Basenese: It’s a great question and I just point investors to the Visa offering. It was a very high quality deal and plenty of capital materialized for it. It was the biggest IPO in history right in the throws of the credit crunch.

So if it’s a high quality company, it’s going to attract a lot of that cash that’s on the sidelines. Right now, institutions are sitting on mutual funds and hedge funds — roughly 20 to 25% cash in some cases. Individual investors themselves are holding about $3.5 trillion in cash. So for the right opportunities that money will come off the sidelines.

Laura Cadden: What criteria do you use when selecting an IPO?

Lou Basenese: Well, when looking at IPOs you really can’t focus on technicals because there aren’t any trading histories for these companies… so it’s purely fundamentals. There’s a variety of factors that I’m considering — is the company a first mover or does it have some technological advantage?

But for an individual investor there’s really three key factors you’ve got to focus on. I think the first one is really asking the question is the company profitable. That may sound silly, but if you look back to the dot com days, 75% of the companies that came onto the IPO market and flopped weren’t profitable. Some didn’t even have revenues. Others didn’t even have a product.

So if you screen simply for that criteria alone you’re weeding out a lot of the duds.

The second thing I think you need to focus on is where are the IPO proceeds going. With IPOs, you’re really investing in the business of tomorrow so you want to see that the company’s going to reinvest that money that they’re generating from the IPO to pursue those growth opportunities.

The last thing is purely statistical based. Research out of the University of Florida confirms that when IPOs come to market, companies that have at least $50 million in sales prior to going public perform much better in the after market. The average return is about 41%.

Laura Cadden: So are there any upcoming IPOs that you have your eye on?

Lou Basenese: Absolutely. With oil prices so high there’s a lot more interest in green technologies. I think one of the most promising is wind power. There are two IPOs that are debuting in that sector shortly. The first one is Noble Environment. The proposed ticker is NEPI and the second one is First Wind, which is WNDY. So those two I think are companies that you should definitely keep on your radar. Then the third one that I would recommend is keep on eye on Education Management Corp. It’s online post-secondary education. So the proposed ticker is EDMC.

Laura Cadden: Let’s talk for a moment about Alpha Intelligence Alert. Rumor has it you have a stellar track record.

Lou Basenese: We’ve been very blessed. I think it’s a function of the fact that we’re willing to go both long and short the market at the same time. So in the beginning of the year that served us very well — shorting the major indexes for double-digit gains in short periods of time.

We also played the consumer crunch with Hibbit Sports, as well as the housing crunch with Georgia Gulf Corp. But that’s not to say we haven’t had success on the long side as well.

We’ve just been focusing on businesses that have recession-proof models. For instance, Waters Corp., WAT. Most recently about the middle of June we made a bet, a double short bet against oil, which has panned out pretty well for us right now. We’re up about 40 to 45%. So, see how that works out.

Laura Cadden: Very well done. And thanks so much for the information.

To learn more about Lou’s service, Alpha Intelligence Alert, go to www.oxfordclub.com.