Forget Alibaba, Buy These 3 IPOs Instead
Fri Sep 19 2014
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Forget Alibaba, Buy These 3 IPOs Instead

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Every time there is a hot IPO, investors ask themselves the question: should I get in?

That’s true again with Alibaba and its record IPO set to launch this week.

It was also the question last year with Twitter and the year before that with Facebook.

But who says you have to buy an IPO on the day it first starts trading?

IPO stocks can be volatile in their first several months of trading, especially up to and after their first earnings report, as investors turn from trading on momentum to actually caring about the fundamentals like sales and earnings.

Some investors in recent “hot” IPOs like Potbelly have discovered that the first day bounce might not stick around for long once investors start asking where the earnings growth is going to come from.

Buying Months After the IPO

Let’s say you decide to take an initial pass on Alibaba shares and wait to buy it later.

Investors who waited to buy Twitter, which went IPO last year, ultimately could have bought shares more than 20% under the initial opening price on the day of the IPO just 7 months later.

The same was true of Facebook. Shares initially popped higher but if you had waited just a few months to buy it, you could have gotten it at nearly 50% off.

Of course, waiting doesn’t guarantee you’ll get the shares cheaper.

In 2006, if you had waited to try and get Chipotle shares cheaper a few months later, you’d still be waiting. Shares traded below the price on the first day of trading only briefly in the first few days after the IPO and a couple of days a few weeks afterwards.

But besides those few brief moments, shares have traded higher than the price on the day of the IPO. Shares did take a pounding in 2008, during the Great Recession, along with the rest of the stock market but they still never traded down to the level of the 2006 IPO price.

3 IPO Stocks to Buy Now

Instead of rushing in to buy Alibaba, why not check out a couple of hot IPOs from 2013 to see how they’re faring?

I tracked down a list of companies that went public in 2013 and then screened for a top Zacks Rank.

I also looked for projected 2014 earnings growth in the double digits. After all, one of the attractive things about IPOs is that they’re usually fast growing companies.

I didn’t look at valuation at all, as you can expect to pay more for growth.

These three companies fit my criteria to a tee.

1. Hilton
2. Sprouts
3. Veeva Systems

Two out of the three have seen their shares fall considerably since their initial day of trading. The third one is actually trading higher than the day it went IPO, but its fundamentals are solid so I’m also including it.

Just because you don’t get in on the day of the IPO that doesn’t mean it’s too late. Look for buying opportunities.

IPO stocks are usually volatile in their first year of trading. You may be able to get in at a much lower price and valuation.

1. Hilton Worldwide Holdings Inc. (HLT – Snapshot Report)

Hilton operates 4,200 luxury hotels and resorts worldwide through 11 brands including Hilton Hotels & Resorts, Waldorf Astoria Hotels & Resorts, Conrad Hotels & Resorts, Curio, Doubletree, Embassy Suites, Hilton Garden Inn, Hampton Hotels, Homewood Suites and Home2 Suites.

What is a 95-year old brand doing having a recent IPO? The company was taken private in 2007 by Blackstone in a $ 26 billion buyout. On Dec 12, 2013, it went public again and the shares have surged nearly 15% in that time.

Investors had a few opportunities to buy it under the IPO launch price in early 2014, but shares have moved higher recently.

Fundamentals are solid. Earnings are expected to jump 29.7% in 2014 and another 19% in 2015.

You’re not getting it cheap, but that’s par for the course with IPOs with strong growth. It is trading with a forward P/E of 36.

Hilton is a Zacks Rank #3 (Hold).

2. Sprouts Farmers Market, Inc. (SFM – Snapshot Report)

Sprouts operates 182 stores grocery stores in 10 states offering natural and organic foods, vitamins and supplements, and body and household items. It is cashing in on the strong demand for fresh produce and locally sourced foods.

It went IPO at Aug 1, 2013 but investors have been jittery. Shares are down about 25% since the IPO.

They’re still not cheap, trading with a forward P/E of 45, but it has tremendous growth. Comparable store sales in the second quarter were a strong 9.5% as net sales rose 20%. It expects to open a total of 24 stores in 2014.

Analysts expect earnings to jump 42% in 2014 and another 27% in 2015.

Sprouts is a Zacks Rank #2 (Buy).

3. Veeva Systems Inc. (VEEV – Snapshot Report)

Veeva makes cloud-based software for the life sciences industry. It counts some of the top drug companies and biotechs as its 200 customers.

This is a high growth company with a high P/E to match. In the fiscal second quarter, revenues were up 53% with subscription services jumping 66%.

The forward P/E is a sky-high 114, but analysts expect earnings to grow 42% in fiscal 2015 and another 33% in fiscal 2016.

Since its IPO on Oct 16, 2013, however, shares have fallen about 20% giving investors late to the game a chance to get in.

Veeva is a Zacks Rank #2 (Buy).

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