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Be Wary of These Toxic IPOs

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Back in February, I questioned the quality of IPOs being brought to market. At the time of my post, many were trading at astronomical valuations relative to some well-established peers, and traders were overlooking years of losses in the hopes of catching the next pop higher. Seriously, how else do you possibly explain Angie's List (Nasdaq: ANGI  ) trading higher after losing money for 16 consecutive years? Is there any actual justification as to why Caesars Entertainment (Nasdaq: CZR  ) should be up considering that, as Foolish contributor Travis Hoium pointed out, it can barely keep up with the interest payments on its $19.8 billion in long-term debt?

But what's even worse is that the success of these companies that I've dubbed "toxic IPOs" is causing a flurry of once-private companies to begin the process of listing their companies to go public whether or not it's prudent for them to be doing so. Based on two S-1 filings late in the week, we have more potential money traps on the way.

A bloomin' idiot?
On Friday, Bloomin' Brands filed plans to offer up to $300 million worth of its shares to pay down its debt! If that's not a warning to call the bomb squad, I'm not sure what is! Bloomin' owns the popular Outback Steakhouse, as well as Carrabba's Italian Grill and Bonefish Grill, to name a few of its restaurant holdings. Bloomin' did grow revenue by 6% to $3.9 billion in 2011 with same-store sales up 4.9%, but when a company purposely seeks IPO cash to retire $248.1 million in outstanding debt, my skeptical alarm starts ringing full-blast. This sounds all-too-eerily familiar to what Caesars just did. With $2.1 billion in debt, this looks like an IPO worth running away from.

A tech wreck?
Even high-growth tech companies have me raising an eyebrow in suspicion. Specialty firewall company Palo Alto Networks proclaims to have developed a newer generation firewall capable of protecting information in the cloud, and it filed plans on Friday to raise up to $175 million with an IPO. Sales growth has been impressive with sales growing from just $13.3 million in 2009 to $118.6 million in 2011, but the company has yet to turn an annual profit (although it has been profitable through the first six months of 2012 according to its S-1 filing).

What's particularly unnerving here is that Juniper Networks (NYSE: JNPR  ) is currently suing Palo Alto for allegedly infringing on six of its U.S. firewall patents. The last thing the market needs is another enterprise software company embroiled with legal issues that boasts a ridiculous valuation.

Foolish roundup
With Facebook's IPO just around the corner and a host of other companies set to go public in the coming months, the stage has been set for potentially toxic IPOs to continue to march into traders' portfolios. My advice is to really dig into those S-1 filings and discover the true motive behind a company's IPO before you invest! Don't let IPO-mania get the better of you!

Luckily for you, our top-notch team of Motley Fool analysts does their homework. Click here to see for free which stock could benefit from the next trillion-dollar revolution in the mobile sector.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He promises you that he picks on everyone equally. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's as transparent as they come.

Read/Post Comments (1) | Recommend This Article (1)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 17, 2012, at 3:12 AM, techreporter235 wrote:

    Sean, I challenge you to dig deeper in your analysis and talk about what these companies might be worth in several years. For example, Palo Alto Networks is one of the fastest growing and most promising tech companies in the world (and now profitable according to the S-1!), and yet you seem to be negative on an IPO before it has even given a valuation?

    (by the way, Palo Alto Networks is not an enterprise software company. A quick visit to their website and you'd know that)

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