3 busted IPOs to buy now
Posted
Oct 22 2009, 04:45 PM
by
James Dlugosch
Rating:
Is the market turning into a raging bull?
One sure way to tell if a bull market is back is by examining the number of private companies lining up to become publicly-traded securities.
That number seems to be rising. Last week private equity giant The Blackstone Group (BX) announced that it would be selling many of its portfolio companies via the public market. Interestingly, it was the IPO of BX itself that signaled the end of the last bull market in 2007.
But IPOs are a dangerous game for investors. Companies often debut with a lot of hype and at too-high prices. Stocks shoot up, then fall back as insiders and private investors who hold shares start selling. It’s the little guy who chased down shares in the market that loses.
So, I have a better idea for you: buy shares of busted IPOs. Here's why, plus three failed IPOs to buy now.
Today, at the dawn of a new bull market, some interesting IPOs will soon start trading. But the risks haven't changed. When times are good, the price of an IPO often has minimal correlation to true value, and it's often simply hype. And early investors stand ready to sell and bring prices back down.
Consider instead the case for busted IPOs.
Many companies that have ridden the IPO roller coaster now stand idly by with broken valuations. Their business plans may look suspect. But the froth and hype has also been removed.
If they're good companies with solid businesses and lots of potential, you can buy huge upside potential at much lower cost, with much less downside risk. That’s an equation that makes sense to me.
Here then are three ideas for those interested in the busted IPO.
The Blackstone Group (BX)
Leave it to the ultimate private equity institution to time the market perfectly. The Blackstone Group (BX) went public in late 2007 just as the market was about to reverse course. At the time of the offering, investors scooped up shares enthusiastically, sending the price to above $30. It did not take long for the sellers to push that price down. In fact, the stock did nothing but go down in the first year-plus of trading. The environment was not conducive to big profits for any financial institution, including BX.
But today, you can buy BX for just over $15 per share. You're buying shares as the market for financial services is beginning a new profit cycle. That is far better than buying shares at $30 near the end of the last business cycle. I would buy BX today.
Orbitz Worldwide (OWW)
Another late-2007 IPO was for the hot online travel booking site, Orbitz Worldwide (OWW). It should be noted that The Blackstone Group had was involved in this offering as well. Shares traded for $15 at the time of the offering, but quickly fell apart in grand fashion. At the bottom, investors could have bought OWW for about a buck per share.
Was the company busted or was the market busted? In this case, the market was the problem. Shares of OWW have since rallied to its current price of around $6.50 per share, far below where they traded initially.
The discount is still a big opportunity for investors. The economy is on the mend, and travel, both leisure and business, looks to increase over time. That should bode well for the booking company that has established itself as a key player in the industry. The stock is worth at least $15 in my opinion.
Dice Holdings (DHX)
Is it really worth the dollars to go public at the end of a bull market? I get the allure, but the subsequent bust of an IPO may ultimately do more damage in the long run. Then again, some lucky private investors are able to profit at the higher sale price. It should be no surprise to find our third busted IPO in the 2007 offering trash heap. Dice Holdings (DHX) went public in late 2007 and has spent its public-trading life in selling mode. The bottom was reached in March at $2 per share.
In the case of DHX, the collapse should not be much of a surprise. The company specializes in job searches. When companies are not hiring, its business will naturally suffer. That said, with a recovery taking place it may be time to look at this business anew. It is a perfect time in the cycle to be buying any business tied to the job market. The job market will be the last thing that improves as the economy returns to growth. Though DHX has returned to about $7 per share, that is half what it sold for in 2007. It is not too late to buy DHX and participate in this IPO at half the price.
Investing in IPO’s can be a thrilling experience. Unfortunately in many cases the thrill is replaced by disappointment. However, buying a busted IPO gives you some of the same thrill and less chance of disappointment.
Get the names and buy prices of 5 More Busted IPOs to Buy Now here.
At the time of this writing, Jamie Dlugosch did not own shares of BX, OWW and DHX in personal or client portfolios.
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