Should You Buy Into the Latest IPO Craze?

3 recent IPOs draw interest from investors

   

Between earnings season and merger mania, Wall Street is plenty busy. But what’s also heating up is the IPO market as a number of high-profile initial public offerings hit the trading floor.

Now that several of these newly-public companies have a few trading days under their belt, let’s take a closer look at their profit potential and nail down whether any of these are a worthwhile buy right now.

First, discount retailer Five Below (NASDAQ:FIVE) went public last Thursday, July 19. This 10-year-old chain is not your grandmother’s dollar store. From cosmetics to posters to electronics accessories, everything in the store is $5 or less, so Five Below is a cut above most dollar stores. With more than 200 locations across 18 states, Five Below’s wares cater mostly to preteens and teenagers but the store also includes products suited for adults as well.

Investors clearly liked this edgy business model as shares of FIVE popped over 50% above the initial $17 pricing in the first few days of trading. As for me, I want to see a full four quarters of earnings results before jumping on this bandwagon.

The fact is that there are plenty of good discount retailers to buy into right now; for example, well-established competitor Dollar General  (NYSE:DG) is in the middle of shaking up its product offering and is headed towards 23% earnings growth this quarter.

Next up is Kayak.com (NASDAQ:KYAK), which debuted on Friday, July 20 at $26 per share. Shares of KYAK have soared over 20% in the past five trading days and the company reached a market cap of $1.27 billion.

For those of you who are constantly traveling, you very well may recognize Kayak.com as one of the leading travel meta-search engine. Kayak.com is best known for comparing airline, hotel and car rental rates from other travel sites, but it also offers trip management tools and price alerts. It is a very useful service, but it is facing increased competition from players like Hipmunk.

And what’s even more alarming is that Google (NASDAQ:GOOG) has just bought out ITA Software, whose airfare search and pricing system is the backbone of Kayak.com. Now that it belongs to Google, there is some investor concern about whether Kayak will be able to continue to work with ITA in the indefinite future.

As in the case of Five Below, I don’t recommend buying into Kayak.com until we get some cold hard earnings data from this travel website. In fact, I currently have one of Kayak.com’s big competitors in my Blue Chip Growth Buy List, and with top-notch sales and earnings growth, it has delivered nearly 200% in returns since I added it in 2010!

The last IPO I’d like to highlight is Palo Alto Networks (NYSE:PANW). While this isn’t as much of a household name as the first two (yet), the IPO drummed up enough interest to send shares of PANW up nearly 40% in a few trading days. With a market cap of $1.2 billion, Palo Alto is one of the larger players in the network security industry. The company offers several kinds of firewalls to mid- to large-sized businesses, government agencies and service providers, and its products are designed to adapt to the increasingly complex security needs brought on by cloud-based services and social media.

There’s no doubt that there is a demand for cyber-security solutions—in fact, Palo Alto doubled its total sales in the most recent fiscal year. However, Palo Alto hasn’t yet had a single year where it has been profitable. So while there is plenty of hype now to keep the share price up, I’m going to need to see that this stock is also supported by strong fundamentals.

I won’t add this stock—or any of the other new IPOs—to my Portfolio Grader stock tool until we have a full year’s worth of earnings data to look at. As tempting as it is to dive into one of these new stocks, I must urge that you hold off. The past year has been brutal to many IPOs that were initially quite promising, and in this low-liquidity environment it pays to stick to fundamental strength. Once these companies have proved themselves in the earnings arena, we’ll have a much better sense of whether they are worthwhile buys.

Other IPOs expected to come to market in the coming weeks include Mexican restaurant chain Chuy’s Holdings (NASDAQ:CHUY), enterprise software company E2open, online legal service provider LegalZoom.com, and organic grocer Natural Grocers (NYSE:NGVC).


Article printed from InvestorPlace Media, http://investorplace.com/2012/07/should-you-buy-into-the-latest-ipo-craze-dg-goog/.

©2014 InvestorPlace Media, LLC

Comments are currently unavailable. Please check back soon.