Dumpster Diving: Two Broken IPOs

05/18/2015 9:00 am EST

Focus: STOCKS

Linda McDonough

Hedge Fund Analyst, Profit Catalyst Alert and Growth Stock Strategist

Searching for bargains among initial public offerings trading well below their offer price is like dumpster diving, as some are trash for a reason, explains Linda McDonough, contributing writer to Personal Finance.

However, broken IPOs can offer investors the chance to buy terrific little stocks at bargain prices. In other words, one investor's trash is another's treasure.

The current universe for broken IPOs offers plenty of pickings. Nasdaq reported about 256 IPOs in the 12 months ended in March, and of those, about 83 traded below their offer price recently. After sifting through these stocks, we found a pair of possible diamonds in the rough:

Century Communities ( CCS)
Century Communities is a homebuilder that stumbled on a slightly weak third quarter. Green Bancorp is a regional bank trashed thanks to its energy exposure. Both offer investors terrific value.

Brothers Dale and Robert Francescon founded Colorado-based Century Communities in 2002. The siblings steered CCS safely through the 2008 housing meltdown, no small feat.

With the housing market on solid footing, the pair expanded into new markets via three acquisitions last year. Partly because of the new territories, earnings ballooned 66% last year. They are expected to double this year and then grow 32% without any new acquisitions in 2016.

Considering the uncertainty of CCS operating in new markets, we use a P/E equal to a third of CCS's 32% expected growth. This yields a Buy up to $29 for the stock.

Green Bancorp (GNBC)
Green Bancorp is a Houston-based regional bank. Regional banks tend to prosper when interest rates increase. Unlike huge national or worldwide banks, regional banks enjoy a loyal deposit base.

GNBC, which went public in August, has been hit because investors fretted about the decline in oil prices eroding the creditworthiness of its borrowers. The company's CEO, Manny Mehos, spent 30 years in the Texas banking industry and is no stranger to the volatility of oil prices.

The company has been adding reserves for energy-related loans and expanding loans to other industries to reduce its exposure to energy.

GNBC is expected to grow earnings 23% next year but is trading with a P/E of only 11. The stock could almost double from this level. GNBC merits a Buy rating up to $18.

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