3 Recent IPOs Poised for Gains
10/26/2011 9:30 am EST
Newly public stocks are generally some of the market’s best gainers. Buying growth names can be risky in a volatile market, but some of these new stocks are positioned for gains in the next uptrend, writes MoneyShow.com contributor Kate Stalter.
Even in uncertain economic and market conditions, I regularly run scans of recent (and fairly recent) IPOs. Stocks that went public in the past decade or so frequently show up among the ranks of the market’s best price gainers.
The IPO market has dried up in the past couple of months, but when I scanned for stocks that made their debut in 2011, several popped out with a good combination of fundamental and technical strength.
Vitamin and supplement retailer GNC (GNC) has been climbing out of a price consolidation that began in August. Upside volume in the past three weeks has been heavier than normal, a bullish signal for the stock.
After going public on the NYSE on April 1, the stock rallied to a high of $26.48 in the next four months. It pulled back along with the general market over the summer. That’s not surprising, because the majority of stocks—even price leaders—tend to trade in tandem with the broader market trend.
There were some pros and cons about GNC’s consolidation. One negative factor was the volatile trade as it formed a base. It’s mitigated somewhat because the market itself was unusually volatile over the summer (and into the autumn), so plenty of stocks sported erratic price swings.
On the plus side, the stock formed a double-bottom consolidation, which can often precede further price gains.
GNC has some good fundamental indicators, as well. The company has been growing its free cash flow in recent years, a characteristic of many market leaders. In addition, Wall Street currently has confidence in the mid-cap, expecting earnings growth of 41% this year and another 17% in 2012.
I’d consider the stock to be in a technical buy range at the moment, because it’s not too far extended beyond its latest point of resistance, just below $25. However, as I’ve been noting for months in this column, broad-market headline risk threatens to sink even strong performers attempting to break out, so caution is warranted.
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Another IPO leader is a stock I’ve written about here before, fertilizer maker CVR Partners (UAN). The company was spun off from CVR Energy (CVI) in early April, going public within a few days of GNC’s IPO.
Like GNC, it raced higher quickly, and began consolidating in the summer. It rebounded after two months, rallied to a new price high, and then retreated again.
CVR Partners was trading in sync with the major indices in late September and early October. The stock skidded to a four-month low on October 4, the same day the indices bottomed. CVR Partners rallied back that day, finishing near its session peak, and has trended higher since then.
It regained its ten-week moving average earlier this month, and has been gradually making upside progress.
However, volume trends could be better. Recent weekly upside trade has come in below average, a sign that institutional investors’ enthusiasm is less than ideal.
CVR Partners reports its third quarter on October 31, and is expected to earn 51 cents per share on revenue of $77.43 million. That would mark a very healthy 83% year-over-year earnings increase and 66% increase in revenue.
If the company performs even better than expected, or gives optimistic guidance, the stock could head higher on good volume. I’ll be watching to see how it acts ahead of earnings.
Another 2011 IPO that’s been a favorite of growth investors since its debut is Fusion-io (FIO). The stock went public in early June, and didn’t have much time to prove itself before the general market weakened. It rallied to a high of $36.98 on June 28, before selling off again.
Fusion-io began trading higher before the broader market hit its October 4 low, a factor that could be a bullish indicator. The stock is working on its fifth week in a row of upside trade, although more robust volume would be nice to see.
The stock gapped nearly 15% higher Monday, and the volume on the session was encouraging, coming in at more than double the average turnover. The move came on a positive article in Barron’s, which forecast that the stock could rise to $52 over the next year.
Fusion-io, which makes flash memory storage, has exactly the kind of pedigree that attracts growth investors. Apple (AAPL) co-founder Steve Wozniak is its chief scientist, and the company counts Apple and Facebook among its customers. Many analysts are already considering the company to be an eventual takeover target.
That’s a tough story to beat…for the moment, anyway. However, analysts have pointed out the weakness inherent in being dependent on too few customers, and the company has been actively working to expand its base.
As of Tuesday, Fusion-io was holding Monday’s gains, a sign of technical strength on a poor market day. The company reports earnings on November 2, so this is another to watch in advance of the report. In the coming weeks, I’d like to see better volume if the stock is able to notch further price gains.