Initial Public Offerings provide a unique opportunity for investors to jump in on a company right away. The problem is that many investors have been burned by an IPO, but then again there is also some big winners out there (Wal-Mart anyone?). In a study of IPO returns by Jeremy Siegel at the Wharton School of the University of Pennsylvania, he found IPOs simply do not beat the market. Measuring returns through 2003 on a portfolio that buys an equal dollar amount of every IPO in each year going back to 1968, you will find that in 29 out of the 33 years between 1968 and 2000 this IPO portfolio underperforms a small cap index. So it is possible for IPOs to beat the market, but overall they do not. Lets take a look at 3 recent IPOs and and see if they have the potential to beat the market.
I am a big fan of Noodles and Company (NASDAQ:NDLS), but unfortunately for investors so is everyone else. Currently up a whopping 250% from its $18 IPO price, Noodles has been having incredible success. For those not familiar with the business, think of a Chipotle/Panera set up, but with all kinds of noodle dishes. With only 343 locations there is a lot of room for this company to grow, and investors are well aware of that, as evidenced by a current P/E of 450. The fast-casual sector has been doing great thus the hype from investors, but the current valuation of Noodles is too much for me. Earnings are projected to increase 37.5% in 2014 to $0.55 EPS; that sounds great, but that's not what the stock needs to retain its current valuation. I feel it is only a matter of time until investors realize this stock is over-bought at the moment, and the price drops. Noodles and Company will stay on my watch list for now, as I wait for a better entry point. The CAPS community agrees with my current assumptions, issuing the stock a paltry 1-star rating.
Gogo (NASDAQ:GOGO) is probably a familiar name to those who are frequent flyers. Gogo provides in-flight internet connectivity and wireless in-cabin digital entertainment solutions in the United States and internationally. Lets be honest, who likes sitting on an airplane doing nothing? Nobody. Gogo delivers over 150 movies & TV shows to passenger's Wi-Fi devices, along with the ability for them to use the Internet. Sounds great, but are passengers willing to pay? In 2010, 4.7% of passengers payed for Gogo Internet access, and their "take rate" is now up to 6.2%. I feel this is because our society has become more addicted to the Internet, and needs to know what is happening with friends (social media) and our world instantly. In another impressive statistic, Gogo has managed to increase its per-session fee by 55.6% without losing customers. Passengers want their Internet!
Gogo has a near monopoly on this business, so with no competition to undercut them, raising prices is OK if customers are willing to pay increased fees. Unlike Noodles, Gogo has tanked a bit from their IPO price of $17, down 35%. Gogo is going through some growing pains in the earnings department due to aggressive international expansion. On the positive side, revenue grew 37% from a year earlier in Q2 to $79.4 million. The growth is definitely there for Gogo, and positive earnings will follow soon. Gogo will also be added to my watch list, and with some more rough quarters ahead, a better buying price should appear.
Which food company has products that can be found in approximately 85% of U.S. households? Pinnacle Foods (NYSE:PF), with brands such as Duncan Hines, Aunt Jemima, and Vlasic. With a $3.3 billion market cap and solid 2.6% dividend yield, Pinnacle Foods has already established itself on Wall Street. I love that they are already paying a dividend and rewarding shareholders; personally, it gives me confidence in the company. Based off of 2013 projected and reported earnings, a current P/E of 18 for Pinnacle is not bad, especially with expected growth of 11.6% earnings growth in 2014.
Pinnacle is not going to provide monster growth like Noodles and Gogo, but I believe it will be steady for years to come. A 40% increase from Pinnacle's June IPO price of $20 is a moderate gain, but not ridiculously out of proportion. My argument for food companies remains the same: people need to eat, and the population is increasing--thus sales of food must increase. Therefore, Pinnacle Foods might be a good addition to your portfolio. CAPS community remains undecided with a current rating of 3 stars, but with a small sample size I feel this will increase with time.
IPO's are always hard to judge, as new business and new management take time to research. Even though historically IPO's have been shown to underperform the market, there are always some good ones to pick out. Hopefully I have given you a better thought on three of them today, and you can make a more informed decision about your investment.
Grant Hosticka has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.