by Hilary Kramer | November 30, 2013 8:00 am
Count me as one of the people who likes Twitter’s (TWTR) long-term potential, but TWTR’s decision to raise its opening share price into the $23-$25 range, and its subsequent move to over $40 per share makes it too rich for you, a robust IPO market has given us a lot of new names to work with at better prices.
Stocks that are new to the market are a natural place for any investor looking for outperformance when it comes to growth – an increasingly scarce commodity in today’s economic environment – as well as undiscovered value.
While many of these stocks are, like TWTR, dissected to endless degree before they even launch, most have yet to attract a real Wall Street following, which puts an individual investor who can do the due diligence on something closer to even footing when it comes to spotting an inflection point early.
And of course these companies tend to be a lot younger than the mature giants of the S&P 500, so they tend to be much earlier in their ultimate growth curve, leaving today’s shareholders a lot more upside to capture along the way.
When a market that can only chase so many hot new tickers at a time ignores that kind of growth opportunity, street-level traders can make money. Take The Container Store (TCS), which trades for over double its $18 IPO price, but has yet to attract serious analyst coverage.
So far, we can see that same-store sales at this cult housewares retailer have climbed for 13 straight quarters and overall revenue is up 35% since 2010. In the world of retail, that kind of trend is revolutionary – as the summer quarter taught us, the average store stock is actually 3% to 5% worse off on the top line than it was a year ago, while profitability has deteriorated even faster.
As far as margins go, TCS books a healthy 58% gross profit on its sales and passes that advantage on down the earnings statement. EBITDA margin is double the industry average and once the company can deliver a track record of sustainable profitability it will clearly be a force to be reckoned with.
The problem is simply that we don’t have institutional research to fall back on here. There’s no real consensus on how much TCS can grow in the near term with its online store and call centers starting to generate real traction. And in the absence of forward multiples or other metrics, the stock is largely at the mercy of sentiment.
Keep TCS on your radar and watch the way it trades over the next few months.
Likewise, SFX Entertainment (SFXE) was not anointed as a Wall Street darling when it hit the market. Shares of this “electronic dance music” concert promoter priced at $13 but haven’t even cracked above $10 in awhile as the stigma of the broken IPO keeps analysts and potential buyers alike away.
But in the absence of a historical earnings trail, it’s hard to evaluate whether the big banks that backed this deal really got the price so far wrong. SFXE reported $68 million in revenue for the first half of 2013 in its prospectus, but the company is still so new that longer comparisons are really meaningless.
What we do know is that impresario CEO Bob Sillerman is an absolute genius when it comes to recognizing new entertainment genres, rapidly consolidating independent operators and then finding a very lucrative exit.
He did it with radio stations and stadium concert promoters in the past, generating 3-digit outcomes for outside investors who took a chance on him early on. Along the way he also had a hand in the American Idol franchise and built a $1 billion fortune for himself.
This time around, he’s trying to crack the $4.5 billion electronic music world built on the “rave” scene of previous generations. These dance parties are both lucrative and seasonal, picking up speed as the summer progresses and then peaking in the New Year extravaganzas in Miami and Las Vegas.
Last year, SFXE was just getting started but its revenue in the second half still came in at 500 times what it booked in the first six months of the year. If we apply anything like that math to the early 2013 numbers, this company could already be a powerhouse in its field.
Either way, Wall Street is as yet oblivious to the upside here, which can create an opportunity. The rewards of getting in ahead of the story can be almost as breathtaking as what insiders get when their companies go public. Look at the winners of the year so far: oncology drug developer Insys Therapeutics (INSY) went public in May and has quadrupled in value, while software publishers Textura (TXTR) and Marketo (MKTO) provide similar examples from the technology sector.
For those looking for sentiment over substance, veterinary drug developer Aratana Therapeutics (PETX) is actually less far along than SFXE in terms of monetizing its business, but the stock has performed beautifully since the company went public in June.
Speaking of monetizing the business, management has taken a company with no hope of ever translating a massive audience into cash and turned it into an engine that is already generating $4.40 per active U.S. user and increasingly rich revenue from a massive foreign market.
That simple truth has yet to really percolate into markets that still think this company has no pay-for-play component and will never be profitable. From what I’ve seen its Asian counterparts produce, Twitter is still in the very early stages of capturing a very large revenue opportunity.
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