Even more so, considering that last week’s debut of Digital Globe (NYSE: DGI) – a provider of satellite imagery used in Google Maps and Microsoft Virtual Earth – garnered interest reminiscent of the IPO heydays in the late 1990s.

Heck, it broke into Google’s Hot Trends list, meaning it was one of the fastest-rising search terms in the world. (That’s no small feat considering it meant beating out pop culture search mainstays Britney Spears, Ashton Kutcher’s twitter record and Desperate Housewives spoilers to name a few).

However, I’ve learned hype seldom translates into profits in the IPO space. In fact, I revealed that I was skeptical about the Digital Globe IPO from the outset.

Sure enough, the aftermarket performance only confirmed my suspicions. Despite pricing above the projected range at $19, and rallying in the first few moments of trading, the stock is now in negative territory.

Nevertheless, the buzz is building about another tech IPO this week. But it, too, should be avoided. Let’s take a look at why. Then I’ll share my proven formula for sifting through the IPO hype to find sure-fire winners.

Tech IPOs: Cancel Your Reservations at OpenTable

On Thursday, the tech IPO, OpenTable (Nasdaq: OPEN) a provider of online reservation services for restaurants, will begin trading.

As a frequent user, I’ll concede it’s a convenient service. In a few keystrokes I can guarantee a table at my favorite sushi restaurant, instead of waiting on hold forever or getting an answering machine. And it’s free.

Don’t worry. This isn’t some dot-com company with a clever idea and no revenue stream. It makes money by charging restaurants one-time installation fees (avg. $1,200), monthly service fees (roughly $260) and $1 for every reservation.

A novel concept, for sure. That’s probably why so many investors want a piece of the deal.

Yesterday morning, underwriters increased the pricing range by 31% to $16 to $18. Such a big bump only happens when a deal is oversubscribed.

Why The OpenTable Tech IPO Will Be A Dud

Don’t be so quick to book a seat at this tech IPO, though…

• We all know the restaurant industry relies on the consumer to thrive. In such an abysmal spending environment, OpenTable’s growth initiatives will certainly be hampered.
• Speaking of growth, it’s limited. OpenTable already counts 9,500 of the 30,000 reservation-taking restaurants in North America as customers.
• The best IPO returns come from companies with endless growth potential… Think Starbucks (Nasdaq: SBUX), Chipotle Mexican Grill (NYSE: CMG), or Wal-Mart (NYSE: WMT) in their infancy.
• Plus, barriers to entry for new competitors are low. And consumers can switch allegiance with a click of the mouse, meaning market share can erode before any efforts to combat it can be concocted.
• Making matters worse, the company’s struggled with profitability, reporting operating losses in four out of the last five years.
• If that wasn’t enough, the valuation is completely out of whack. At the midpoint of the proposed pricing range, shares would be valued at 6.4 times 2008 sales. The average company in the S&P 500 only trades at 1.8 times sales. Even more glaring, OpenTable’s initial price-to-earnings ratio would be a whopping 106!

Even the village idiot knows that’s frothy.

Don’t overlook what insiders are doing either. They’re cashing out 1.4 million shares, equal to almost 50% of the total offering. On average, insiders cash out less than 30%. Seems like they’re tipping their hand about the company’s shaky growth prospects.

We’ll be getting our answers regarding OpenTable shortly. Regardless of whether it soars or dives, the fact that it successfully debuts will usher in more IPOs in coming months.

Three Steps to IPO Success in Any Market

Here are three key steps that I would insist on before buying IPOs in any market:

• Profitability. Sounds obvious, but most companies that flop in the aftermarket lack earnings. Insist on at least two years of profitable operations.
• Long-Term Growth Potential. The reason IPOs can be so darn profitable is because they represent the opportunity to invest in the infancy of a company’s growth cycle. Accordingly, focus on companies with verifiable long-term growth potential. Stick to companies with a market potential that points to a decade or more of heady growth.
• $50 Million or More in Annual Revenues. Research out of the University of Florida confirms revenues are a good predictor of stock performance. The key threshold is $50 million for the 12 months prior to an IPO. Companies below that level underperformed the stock market by a margin of 15% for the next three years. Those above it outperformed.

One more thing, IPOs are just like any other investment. Ultimately, fundamentals win out in determining share prices. So, after confirming the three characteristics above, take some time to dig into the underlying business. The stronger the fundamentals, the greater the profit potential.

Good investing,

Louis Basenese

Source: Tech IPOs Are Back… But Don’t Buy This One

JL: So, care to guess what’s on my mind?

CASH: Uh, how about you just tell me, and we’ll pretend I guessed right.

JL: OK. The answer is “burritos.”

CASH: I’m afraid to ask why…

JL: What, you don’t remember? A couple months ago — in early May, to be exact — we talked about one of your favorite stocks, Chipotle Mexican Grill (CMG:NYSE).

CASH: Oh yeah! Chipotle was a major home run. The stock was offered at $22 in early 2006… by the end of 2007 it was well over $150. And investors who didn’t catch the IPO price still had a chance to jump on the rocket ride for huge upside. It’s a powerful example of what the right IPO at the right time can do.

JL: Yep, the early gains were definitely impressive. More than 600% if I recall correctly. But that wasn’t the gist of our conversation in May. The Taipan Daily episode was “Cash Tours the Dark Side,” and you were talking about going short CMG back then.

CASH: Man, you file away everything in that big brain of yours, don’t you? You’re right… CMG was a big winner coming and going for me. Not only was I excited to grab hold of CMG shares for potential 600% gains on the upside, I got excited again when investors took Chipotle too far — making the stock a prime short candidate as it fell back to earth.

JL: Right. So again, looking back on our conversation (which readers can do here), we first started talking about a CMG short on May 6. That was a solid 30 points ago, and CMG shares have coughed up nearly a third of their value since you made that call. Not a bad little short.

CASH: Nope, not bad at all. And there are plenty more great plays out there, too — a few of which are on the books of IPO Confidential as we speak. But you said you had burritos on your mind… What’s the reason for bringing this up again here and now? If I know you like I think I do, the hamster wheel is turning.

JL: Is it that obvious? Considering we’ve been pals for nine years, I guess it is. I’d like to know your current opinion on CMG — partly because I just came across a strongly bullish analyst opinion on the stock.

CASH: Well, let’s see… I’m pretty confident in saying that this is a really, really risky time to be dipping into a growth stock like Chipotle. You can certainly buy the stock for less than you would have paid at the beginning of the year — a whopping 50% less, in fact — but there are many external pressures that haven’t been fully realized in the share price yet. Of course, this is just my humble opinion…

JL: I can think of many colorful words to describe you, ol’ buddy, but “humble” isn’t one of them.

CASH: Touché. What about this bullish analyst opinion you cited? What was the main reason for being bullish CMG?

JL: That’s the part that felt sketchy to me. There was the standard long-term reasoning for liking CMG — quality food, quality service, nice atmosphere, etc — but a big reason cited for buying was overreaction from Wall Street.

CASH: “Overreaction”? That sounds like one of those fishy analyst buzzwords.

JL: The guy was saying CMG got crushed because of an earnings miss. When the quarterly numbers were light by a penny, the stock tanked big time, wiping $540 million off the company’s value. The analyst pegged the sell-off as a huge blunder by Wall Street, saying there was no reason for CMG to fall so hard on a miss of one lousy penny. In his view, this made Chipotle a great value buy.

CASH: Ack! You’re kidding me,

right? This guy honestly thinks that the stock sold off just because of a one-penny miss? He really thinks that the rate of growth is healthy? He honestly wants to own the stock at more than 25 times “projected” earnings for this year? In this environment?

JL: Easy there, friendo. No need to spit coffee all over your trading screens…

CASH: I know, it’s not you I’m upset with. But… Hey, wait a minute. You knew that would get a rise out of me, didn’t you? You just wanted to see my reaction…

JL: No comment. Heh.

CASH: OK, I’ll play along. Given all that I’ve seen in the trading and investing game, I still can’t believe the wacky rationale out there sometimes. The penny miss actually had NOTHING to do with why Chipotle sold off so sharply. That analyst apparently has no idea what really moves a high-multiple growth stock like CMG.

JL: So enlighten our readers. What caused Chipotle to crack wide open if it wasn’t the penny earnings miss?

CASH: Well, as you know, anytime a company reports earnings, the headline numbers can be compared with the picture from the rearview mirror. The headline numbers tell us what happened, in the past tense… not what’s happening right now, or more even more important, the outlook for future business.

JL: So Wall Street didn’t pummel CMG because of a single penny. They pummeled them because the outlook for the future was darker than investors could take, especially with the stock trading at a high multiple.

CASH: You got it. Looking out the windshield (as opposed to the rearview mirror) reveals a much uglier picture. Management actually noted that they were seeing weakening trends in the upcoming quarter that bode further ill for CMG’s business.

JL: You’re talking the same ills we covered back in May, when you called out CMG for a potential short. Consumers tightening up, lower cost competitors, high prices for ingredients, and so on.

CASH: Those are the basic factors, yes. They’ve played a big role in taking the stock way down from its $150 high, but none of the downside factors for CMG have been fully “brought to bear” yet.

JL: Groan…

CASH: I couldn’t resist. Anyway, looking at CMG now, and considering the still-high earnings multiple, the most positive thing you could say is that the company is “reasonably priced.” But even that assumes a positive outlook on the economy, a firm grip on what Chipotle will be earning in future quarters, and a lack of better investing opportunities.

JL: That’s a lot of assuming.

CASH: No doubt. And the truth is that we are NOT in a strong economy, we are NOT confident that CMG can continue to grow at its current rates, and I am NOT anxious to put capital to work in growth stories right now. The scenario simply has nothing exciting about it.

JL: You mentioned the “still-high earnings multiple.” So clearly you still think Chipotle is expensive in that regard, even after the big earnings haircut it took. We’ve talked about sky-high earnings multiples in the past. I’m reminded of the short arguments you made against VMWare (VMW:NYSE) and Salesforce.com (CRM:NYSE).

CASH: Yep. Those are a couple of other names that simply got way ahead of themselves — to our bottom-line profit, I might add. The simple reality is, there’s a time and a place for buying high-multiple growth companies. As a trader, I’ve made plenty of money buying hot growth names at a multiple of 50 times earnings, and then selling them for huge gains at a multiple of 150 times earnings. That’s the way to make big gains in go-go bull markets.

JL: But this ain’t no go-go bull market.

CASH: Oh, heck no. That’s why we’re raking in so much dough on the short side rather than the long side right now. If you’re not in a bull market, buying growth stocks at anything more than rock-bottom multiples can be a death wish. Any uncertainty with future earnings can take a huge chunk out of the multiple in a moment’s notice.

JL: I’ll say. We saw VMWare drop from $53 to $40 in just one day, not long after you tipped readers to short the stock right here in Taipan Daily. And Salesforce.com dropped close to 20% overnight as one of the short positions in IPO Confidential. (Our paid subscribers were, no doubt, excited to see that gain.)

CASH: Yep, and that’s where most investors’ danger becomes our opportunity. We can short these growth names during a bear market and make 40% to 60% as the stock declines… or even better, buy puts on the same names and watch profits stack up to 200%, 400% or what have you.

JL: It’s like Jesse Livermore once said: “There is only one side to be on in the stock market. Not the bull side or the bear side, but the right side.” I guess that wisdom rings extra true with high-multiple growth stocks.

CASH: Absolutely. There are some solid long plays out there, even in crazy markets like this one — but there’s no doubt that now is the time for bears to be raking in the dough. And I love how our subscribers are doing just that in IPO Confidential.

JL: You and me both, amigo. We’ll catch up again soon.

Justice Litle, Editorial Director, Taipan Publishing Group

Source: High-Multiple Growth Stocks: When to Hold ‘Em, When to Fold ‘Em, and When to Go Short

Chipotle Mexican Grill (CMG:NYSE) is another highflier that’s been beaten up in this tough market.

About two months ago, Cash McDash highlighted CMG as a potential short. (You can read that episode here: “Cash Tours the Dark Side.”) The stock is down about 15% since then… not a bad return for two months’ holding time.

The great thing about names like CMG is that it’s possible to make money both ways. When the IPO came out, Cash knew Chipotle was going to be huge (based on exclusive info from his Wall Street contacts). So he went long and made a lot of money for his clients on CMG.

Then later on, when the stock got ahead of itself and costs began to rise, he made another big chunk of change with a shorting call. It was a great long on the way up, and a great short on the way back to earth.

You can make these kinds of trades, too — long and short — by participating in Taipan’s newest trading service, IPO Confidential. Take a look.

Warm Regards,

JL

Due to Strict Security Guidelines, Details of the Following Message Can Only Be Accessed Here.

Sorry, but we’re simply unable to reveal anything about our newest service here. In order to learn exactly what all the fuss is about, you’ll want to check out our new report, available online now for a short time. Discretion is a must, so please keep this news quiet. Access your copy of the complete report here.

Source: Chipotle Serves Up a Tasty Meal for Shorts

CASH: Don’t sound too surprised now. Yep, IPO activity is at a good level. But we’re starting to see the quality deteriorate just a bit. Nothing too serious — but it’s something to keep an eye on.

JL: Can you explain the “quality” issue a little more? Does that mean we’re seeing more duds come to market?

CASH: Right, that’s part of it. When companies see that optimism is up and liquidity is flowing, it makes sense for them to try and raise capital while that window is open. Keep in mind that few people really expect this firm market to continue. So folks are trying to grab what they can, while they can.

JL: Makes sense. Anything else?

CASH: In addition to lower-quality companies, you’re also starting to see smaller companies tagging along. An example of this is Real Goods Solar (RSOL), a company that’s supposed to price its IPO this week. Because RSOL is so small — less than $20 million in revenues — they’re unable to attract the all-star underwriters. They have to use second-tier partners instead.

JL: So what effect will that have on the stock? If they’re small and putting fewer shares out there, it seems that might benefit the price, right? Keeping supply low to help the ‘ole S-and-D curve?

CASH: Don’t forget the other input for that curve…

JL: Never. Supply and demand is about the only useful thing I got out of college economics. So what do you see on the demand side?

CASH: Nothing.

JL: Nothing?

CASH: Nada. Zip. Zilch. Goose egg. Bagel. The big donut…

JL: I got it, I got it. But what does that mean exactly?

CASH: It’s means there’s just no demand — period. These underwriters (think names you’ve never heard of, like Equity, Canaccord Adams, & Broadpoint) don’t have anywhere near the footprint or the clout that, say, a Goldman Sachs, a Merrill Lynch, or a Morgan Stanley would bring. And so, while this might be a reasonably strong company with limited supply of stock, the underwriting machine is weak. They won’t be able to gin up enough interest for a good price pop.

JL: So do you short a name like this right out of the box?

CASH: Quite possibly. Although I’m a little uncomfortable being short a thin name in a hopeful market, even if the hope is fleeting. But it’s a possibility, and that brings us around to our topic for the day.

JL: Which is?

CASH: Shorting! Last week I said I’d bring a little balance to our banter. Today I wanted to give a little clearer picture as to how Cash McDash makes money on the “dark side.”

JL: Sweet, the dark side! Insert Darth Vader joke here. Can we talk about Jedi mind tricks, too?

CASH: Let’s not and say we did.

JL: Fair enough. Where should we begin?

CASH: Well, there are basically two different categories of short trades that I use. We can skim over the first and dig a little deeper into the second.

JL: Hold on! We’re just getting into the good stuff and you’re already skimming? Why don’t we take ‘em one at a time and get some more detail.

CASH: Because the first category of shorting doesn’t quite fit for this type of conversation. The trades are too specialized… Oftentimes they have to be executed very quickly, with very little notice, in order to lock in solid profits. I can tell you “how” that’s done, but if I tried throwing out picks in that area to a broad audience, it would be more trouble than it’s worth. I’m more interested in sharing that type of info with a small, select group of readers who are dead serious about their trading gains.

JL: Fair enough. So give us the Cliffs Notes then.

CASH: Well, the first way I make money on the short side is by selling underwriting dogs right from the beginning — “out of the box,” as you say. Because I’m so plugged in to that whole hidden process of taking companies public, I see what most others don’t. I know whether or not the demand is there, and I can get a very clear read on whether or not the underwriters have buyers for the stock.

JL: Hey, so you’re kind of like that guy Simon Cowell on American Idol or something. Except you, uh, judge new issues instead of wannabe pop stars.

CASH: Ugh. I’d rather be Darth Vader. But, yes, from time to time there are deals that are just destined to fail. And even although the public can sometimes get excited over these deals, my behind-the-scenes view makes it exceedingly clear that money is to be made on the short side.

JL: How about an example folks might recognize.