Update watch list stock A123 Systems (AONE)

05/13/2010 2:07 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

Lithium-ion battery maker A123 (AONE) is an object lesson in why buying into popular IPOs (initial public offerings) can be so dangerous—for investors who aren’t part of the initial insider crowd anyway.

Consider this post an explanation for why this stock has been on my watch list since September 25, 2009. And why I’m only finally starting to look at buying it now.

A123 went public in September 2009 in a high anticipated offering. Here was a startup out of MIT with technology that would make the company the next big thing in batteries for hybrids and all-electric vehicles. The stock opened for trading at $19.60, already above its offering price, on September 25 and then went on to run up to $25.77 as investors who hadn’t been able to get any shares before the stock went public rushed to get in now. Anybody who owned shares at the first trade price was looking at a 31% gain in a week. And some of those initial investors took their profits. The stock dropped to $14.70 by mid-November on the selling.

But many investors couldn’t sell. The investors who had put money into the company before it went public were required to hold onto their shares for a lock-up period of either 90 or 180 days, depending on exactly what kind of relationship they had with the company before the IPO. With approximately 72 million shares locked-up the stock recovered from that initial round of profit-taking to climb back into the low $20s by the end of December.

It’s been all downhill from there as first the 90-day lockup and then the 180-day lockup expired. (The 90-day would have expired, roughly, on December 25, and the 180-day on March 25.)

The shares closed at $9.63 on May 7. That’s 51% below the $19.60 of that first post-IPO day.

I think that’s a reasonable bottom for this stock.

The company announced first quarter earnings and revenue—a loss of 28 cents a share and $24.5 million, respectively—that were below Wall Street forecasts. But I don’t think that kind of quarterly number-watching is important for a company at this stage. Demand for the company’s batteries is growing as A123 adds more customers. The company announced that it was going to expand production capacity by 36%.

If I liked the general stock market more than I do at the moment, I’d move this stock off my watch list and add it to Jubak’s Picks today. But I’m going to wait for the recent market volatility to play out a bit. In the last week the market has moved from oversold to maybe a bit overbought. I’m going to see where that cycle goes next in the very short-term.

I have bought what I call a watch position for my personal portfolio. A watch position is a buy of a few shares, certainly way short of what I think of as a full position in a stock. But I find that holding a bit of the company focuses my mind and makes me pay closer attention as I try to figure out when to add a full position. And that’s where I am today with A123 Systems.

Full disclosure: I own shares of A123 in my personal portfolio.
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