Last November, I wrote about Nymex Holdings' (NYSE:NMX) breathtaking IPO, in which shares surged from $59 to $132.99. While the firm is solid, I thought its dizzying rise was another case study on the dangers of IPOs. Now, Bloomberg reports that a sizable group of traders is betting that Nymex's stock will plunge just as dramatically.
In business for more than 134 years, Nymex has a hammerlock on listed energy and options contracts, with a global market share exceeding 60%. Unfortunately, it's premium-priced, with an enterprise value-to-revenue ratio of 21. Admittedly, other exchanges also trade at nosebleed valuations, including InterContinental Exchange (NYSE:ICE) and Chicago Mercantile Exchange Holdings (NYSE:CME), with respective multiples of 29 and 16.
To put things in perspective, these valuations even make some tech highfliers look affordable. Google's (NASDAQ:GOOG) EV-to-revenue multiple is 11, while Salesforce.com's (NYSE:CRM) is 9.
Nymex's small float of 7,475,000 shares provides a key point of leverage for its valuation. Many liquid hedge funds need little firepower to buy a big chunk of that float and move Nymex's stock. However, that float may expand, since the Nymex plans a follow-on offering. It's unclear how many shares the company will sell, but the overall offering could be worth more than $1 billion.
Remember that some traders are loading up on their short positions in Nymex, betting that its price will fall, with their total amount topping 4 million shares. While this is not a guarantee that Nymex's stock price will collapse, it definitely suggests that traders are bearish. So are Wall Street analysts; in a rare move, not one of them gives Nymex a "buy" recommendation.
It's a high-stakes game of chicken, with traders hoping to make serious money on upcoming trigger events like Nymex's quarterly earnings and the follow-on offering. While the drama should be exciting to watch, it makes Nymex the wrong kind of stock for long-term Foolish investors.
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Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is currently ranked 1,873 out of 23,837 in CAPS. The Fool has a disclosure policy.
