For the most part, I consider the acronym “IPO” to actually stand for “It’s Probably Overpriced.” There’s just so much hype around an initial public offering that the market frequently prices shares unrealistically, or they reach that level very quickly.
There are many reasons for why this happens, even with companies that don’t have actual earnings or for those that aren’t even that sexy. The idea an IPO puts in most investors’ minds is that it represents some amazing thing and that one can get in on the ground floor.
Because the number of shares offered in the float isn’t terribly large, if there’s even a whisper of hype, it can create momentum buying. Sellers dump shares as they rise to new buyers, who dump shares to the next group of buyers, and so on. Only when the business has been reporting for several quarters do investors start looking at valuation.
When that happens — things can go awry. Often, they’ve found that the stock they’re holding is wildly out of touch with reality, and selling ensues. The people who make the money, then, are usually either the people who held private shares before the IPO, or people who eventually buy in at realistic prices a while after the stock is public.
Forget Snap Inc (NYSE:SNAP), then. Instead, consider these lower-profile IPOs that don’t appear to be insanely overpriced like many of their newly public peers.
IPOs to Buy: Invitation Homes (INVH)
I’m not going to say I love the pricing on Invitation Homes Inc (NASDAQ:INVH). It’s valued at $6.75 billion, and will probably report a breakeven 2016 fiscal year when it announces earnings later this month.
What’s attractive is the sector Invitation is in, and how it is executing.
INVH basically buys and rents single-family homes across 13 states, has 50,000 properties, and after its IPO, has a lot of cash plus a billion-dollar loan from the Federal National Mortgage Association (OTCMKTS:FNMA), better known as Fannie Mae.
There’s a shortage of rental housing in the U.S., and it will only get worse. Here in Los Angeles, rents are off-the-chart insane. Not only do I think the $2 billion in equity that Invitation has on these properties is going to increase at 5%-8% per year, but it should be able to increase revenues at close to its current 11% clip. INVH generated $248 million in cash flow in the first nine months.
At some point, Invitation Homes will get bought out. That’s what’s happening to other similar businesses.
IPOs to Buy: Camping World Holdings (CWH)
Camping World Holdings Inc (NYSE:CWH) is the kind of small-cap company I like to investigate because it is the biggest player in a niche market — comprehensive services for RV owners. It has 122 locations in 36 states and an internet presence to boot, and 50 years of brand equity built up in its Good Sam and Camping World names.
Financially speaking, CWH has increased revenue from $1.85 billion in FY12 to $3.53 billion in FY16, and grown net income from $42.3 million to $191.6 million. Operating cash flow grows every year, and is now at $223.8 million.
The demographics are good. The RV enthusiast market is growing rapidly, driven partly by the baby boomers, who are retiring. Not only that, Gen-X consumers are actually the fastest-growing demo.
Best of all, many of Camping World’s products are service-oriented high-margin items, driving profits higher each year.
Best of all, CWH trades at a $620 million market cap — which is just 17 times forward earnings. Among IPOs to buy right now, this is downright cheap.
IPOs to Buy: Valvoline (VVV)
Valvoline Inc (NYSE:VVV) seems like a reasonably attractive play for a 151-year-old brand with three solid divisions. It obviously has a well-known lubricant brand that can be purchased in thousands of auto-part stores. But Valvoline also boasts 1,000 franchised oil service stations that perform minor services and repairs.
VVV is on what appears to be a solid growth trajectory. In its prospectus, it reported $196 million in net income for 2015 and $273 million for FY16.
Now, this is coming on stagnant revenue, but same-store sales growth at the company and franchised stores grew 6% and 8%, respectively. The decline in sales was due to “lower product pricing and disposition of car care products…Changes in product mix and higher volume levels increased sales,” according to the 10-K.
However, VVV stock trades at about 20x earnings, and that’s not insanely expensive compared to most recent IPOs. It might be worth watching.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com. As of this writing, he did not hold a position in any of the aforementioned securities.