5 Ways to Beat IPO Investors

Remember when IPO investors were the lucky ones? Hot stock offerings went only to the primo full-service brokerage clients, while the rest of us had little choice but to chase them at much higher prices after they popped at the open.

I guess Mr. Market is having the last laugh on Daddy Warbucks now.

VMware (NYSE: VMW  ) became the latest recent IPO to fall below its initial pricing yesterday. It certainly didn't seem like this would ever happen when the virtualization software pioneer went public last summer at $29 a share.

The stock nearly doubled at the open, and never looked back. Two months later, VMware was peaking at $125.25. The gains came gradually undone after a string of questionable executive sackings, unimpressive financials, and the threat of fresh-faced competitors.

With the stock closing at $27.92 yesterday, those who were so elated to get in on the VMware IPO can't be too happy. They took a round-trip to nowhere.

Then again, that's perfect for opportunistic investors like you and me, who can now snap up a quality company at sub-IPO prices.

More than virtualization
It's not just VMware that is making original public investors envious of those who missed out. Several companies -- quality companies -- find themselves trading for less than their debutante pricing.

My crystal ball stinks. It can't tell you if these stocks have hit bottom. However, the one thing I can tell you is that you can buy into the following stocks and pay less than its IPO investors have over the past year.

 

IPO

Peak

9/17/08

Loss

VMware

$29.00

$125.25

$27.92

(4%)

NetSuite (NYSE: N  )

$26.00

$45.98

$15.60

(40%)

Internet Brands (Nasdaq: INET  )

$8.00

$9.44

$6.77

(15%)

E-House (NYSE: EJ  )

$13.80

$36.45

$7.53

(45%)

Rackspace (NYSE: RAX  )

$12.50

$11.95

$9.04

(28%)

Every busted IPO has a story to tell. NetSuite was supposed to be the next cloud computing darling when it went public at $26 a pop back in October. It was a smoking hot debutante, closing at $35.50 on its first trading day. With Oracle's (Nasdaq: ORCL  ) Larry Ellison as its majority stakeholder and the Salesforce.com (NYSE: CRM  ) cloud computing buzz, how could it fail? It did. Investors can get in at a delicious 40% discount to what the "lucky" IPO investors shelled out 11 months ago.

Internet Brands wasn't exactly a barn burner when it hit the market in November at $8. It eventually inched its way higher, as the market began to warm up to its portfolio of high-traffic websites in the automotive, travel, and residential industries. Despite fundamental weakness in some of its target markets, the company is still growing. Last month, it reported that its revenue and adjusted EBITDA grew 18% and 20%, respectively, in the second quarter. The company is doing just fine in cyberspace, just cheaper.

E-House is China's largest real estate agency. With China's economy humming along, it's easy to see why the stock that went public at $13.80 last summer was fetching $36.45 just two months later. Chinese markets have cooled down, but E-House's business sure hasn't. Revenue soared 79% in its latest quarter. Earnings catapulted 85% higher. With Wall Street looking for E-House to earn $1.01 a share next year, investors are getting a bargain at less than 8 times forward earnings.

Web-hosting giant Rackspace is the only pick that hasn't traded higher than its IPO price tag, but you can lay the blame at the feet of the company's unfortunate timing. Going public last month is salmon's work. IPO investors paid $12.50 a pop, only to see Rackspace open at exactly $10. The stock began to crawl its way back to breakeven, but these past few days have been too much. The stock is now in the single digits. It's a pity, because growth is certainly there, judging by last week's quarterly report; Rackspace posted 56% revenue growth.

Winning the game, fashionably late
Is this is a scary market to go nibbling in? You bet. However, as long as a stock's fundamentals aren't eroding as quickly as its share price, buying in at today's prices makes sense.

It's not just about laughing at the wealthy fat cats who begged their brokers for a shot at paying more. It's about joining them at lower entry points, cheering on the same company with greater gains at stake.

It's the right way to approach this summer sell-off, stinky crystal ball or not.

VMware is an opportunistic pick in the Rule Breakers growth stock research service. The newsletter gravitates to new issues that bring more than money to the table. You can make sure you arrive early -- including a peek inside last night's new issue -- with a 30-day trial subscription.

Longtime Fool contributor Rick Munarriz is a fan of new stocks, and has even recommended several fresh IPOs to newsletter readers in the past. He does not own shares in any of the companies mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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