There's nothing like an IPO to whet investors' appetite for profit. IPOs, or Initial Public Offerings, give traders the opportunity to make a mint, by getting in on the ground floor of a promising company.
That said, finding the next big thing is easier said than done -- you can't always tell which will make a splash, and which will simply flop.
Fortunately, there are a few warning signs you can keep your eye out for. Ask yourself, is this IPO an exit strategy for company insiders? If insiders are dumping this stock, it very well may be.
You may also want to avoid copycat IPOs, companies following the lead of peers that have successfully issued its shares on the market. And you'll want to be sure the move public isn't an act of desperation by a start-up strapped for cash.
So what constitutes an IPO winner?
Those that thrive do so for various reasons: A push from pent-up market demand never hurts, but then again, investors sometimes take their time flocking to a stock. Big-name brands and trendy investing themes also tend to show well straight out of the gate.
But the ones that go the distance ultimately have to produce strong quarterly results to win over the market.
Short of a crystal ball, there's no surefire way to predict an IPO's success on the open market. But taking a look at the sentiment of key investor groups can offer some clues.
We identified recent IPOs that have seen short covering over the last month. Short-sellers turn a profit by selling a security high in order to buy it back low at a later date. Usually, when traders cover, or close, an open short, it means they expect that security to rise.
So a decrease in shares shorted means they think there's more upside than downside to a stock.
Short-sellers tend to be more sophisticated than your average investor -- because there's no ceiling to how high a stock may rise, going short on a position means infinite potential for downside. So it's not a bad idea to pay attention to their trades.
To further refine our search, we focused on insider transactions, and identified the IPOs that have also seen net buying from insider executives.
Insiders and short-sellers think there's upside to these companies ... what do you think? (Click here to access free, interactive tools to analyze these ideas.)
1. Complete Genomics (Nasdaq: GNOM): Offers outsourced DNA sequencing services to academic/biopharma customers. The company completed their IPO on 11/10/10. Over the last six months, insiders were net buyers of 1,650,000 shares, which represents about 22.76% of the company's float. Shares short decreased from 1.02M to 856.00K over the last month, a change that is equivalent to 2.26% of the company's float of 7.25M shares.
2. KEYW Holding Company (Nasdaq: KEYW): Defense contractor roll-up that offers cyberintelligence and cybersecurity systems. The company completed their IPO on 09/30/10. Over the last six months, insiders were net buyers of 63,000 shares, which represents about 0.31% of the company's float. Shares short decreased from 1.59M to 1.34M over the last month, a change that is equivalent to 1.23% of the company's float of 20.37M shares.
3. GenMark Diagnostics (Nasdaq: GNMK): Offers a molecular diagnostics testing system to hospitals and labs. The company completed their IPO on 05/27/10. Over the last six months, insiders were net buyers of 25,500 shares, which represents about 0.36% of the company's float. Shares short decreased from 71.22K to 69.36K over the last month, a change that is equivalent to 0.03% of the company's float of 7.01M shares.
*Please note: Investing in IPOs is an extremely risky strategy. The volatility of these investments can be extreme -- so only analyze these companies if you believe you have an above-average tolerance for risk and investment losses. Insider trading and short float data sourced from Yahoo Finance.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.
Kapitall's Eben Esterhuizen does not own shares of any companies mentioned.
