This week, Solarwinds (NYSE: SWI) became the first venture capital-backed initial public offering (IPO) in more than nine months. That’s a significant event for those who watch the IPO market… it’s also significant for the rest of us – after all, IPOs can be a pretty good indicator of how the stock market is turning.

And in 2009, things haven’t been turning very fast…

In the first quarter of 2009, there were only two new IPO deals done globally; that’s compared to the 100 deals done in the first quarter of 2007. It wasn’t for a lack of eligible companies either: all told, 26 firms withdrew or postponed their initial public offerings this year. That’s no surprise given the global economic slowdown that started last year.

When companies are considering going public, how the market’s faring can have a big effect on them. That’s because the market dictates just how much capital a newly minted stock is able to raise. Investors in bear markets are a lot less likely to pony up as much cash to buy and IPO stock than those who are investing during a market rally. And studies have shown that the owners of private companies going public (venture capitalists and entrepreneurs) are much less likely to start the expensive underwriting process when times are tough.

Things haven’t been helped by the shakeup in the investment banking world. Since the financial meltdown started, some of the biggest underwriters (the firms that help take private companies public) have closed up shop – Lehman Brothers and Bear Stearns among them.

A Turnaround for the IPO Market?

Despite all of the barriers to new public companies right now, it looks like the IPO market is starting to catch some momentum once again. While Solarwinds may be the first venture-backed IPO in three quarters, it’s far from being the first IPO in 2009.

Since January, six large IPOs that have taken place in U.S. markets. Of those six, four have gone public in the last five weeks… That’s a pretty substantial increase in tempo.

And while other economic factors send mixed messages to investors on a daily basis, the warming up of the IPO market is one signal that’s decidedly bullish.

Small-Caps Lead the IPO Rally

Of the six new issues that have hit the markets this year, every single one has been a small cap. The names include highly anticipated offerings like language software developer Rosetta Stone (NYSE: RST), satellite imaging firm Digital Globe (NYSE: DGI), and for-profit college company Bridgepoint Education (NYSE: BPI).

Overall, these IPOs are a big win for small-cap investors. Not only do they provide exciting opportunities to invest in companies that have until now been private, they also suggest that the markets are receptive to a continuation of the rally that took a break last week.

Cheers,
Jonas Elmerraji

Source: Selling the Solarwinds IPO

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

After starting the day with little conviction, Wall Street has gotten its first pot of coffee down its gullet and is making some moves. Even as rather drab economic data filters through investors’ minds, the equities market managed to stretch well into positive territory.

A handful of companies are making strong gains today. Let’ take a look at three of them.

The first “big gainer” is no surprise. I have been writing about Digital Globe (NYSE:DGI) and its public-trading debut for weeks.

The satellite image provider made its initial offering of $19 this morning and Wall Street said, “I’ll pay more.”

Shares opened the day trading for $23, reached a high of $25 and are now trading for just below $22. They are still a good bargain.

Instead of wasting precious bandwidth rehashing my thoughts on Digital Globe and its potential, click here to read my recent review of the company.

Better than Under Armour?

Another winner, and this one actually is surprising, is Gildan Activewear (NYSE:GIL). Its shares are soaring by 25% as investors digest the company’s latest earnings report.

Even though the company missed estimates by four cents and profits declined by 83% (on a revenue decline of just 17%), investors appear intrigued by the comments about falling input costs and increasing margins.

If you have been contemplating an investment in the company, today is not your day to buy. Wait until some of the irrational buyers are out of the way and shares dip. I have confidence it will happen in the next few trading days.

After yesterday’s retail sales figures, there’s a good chance next quarter’s figures may not be as appealing as today’s investors would like. That notion will sneak its way into share price before the end of next week.

Sorry… no monopoly

Finally… Look at that, the government is actually helping investors today. Shares of Rambus (NASDAQ:RMBS), a memory-chip maker, are surging by double-digit proportions as word spreads the FTC has dropped its antitrust suit against the company.

Until today, the FTC was following up on complaints from chip makers that were forced to make royalty payments to Rambus based on its patent portfolio. They claim the company had unfair ties to the guide-line setting Joint Electron Device Engineering Council, which was virtually handing Rambu a monopoly.

In the end the FTC says everything checks out and Rambus is cleared to continue getting those healthy royalty checks.

I wonder if Intel (NASDAQ:INTC) is knocking on Rambus’ lawyer’s doors yet? In case you didn’t hear, it got slapped with a $1.45 billion antitrust suit by the EU… ouch.

The equities market is still unsure about which direction to head or which piece of bad news may be next. With earnings season winding down, I anticipate plenty of red in the coming days.

Fortunately, there will still be lots of newsmakers to keep things interesting and profitable.

Source: Satellites, T-Shirts and Good Lawyers