With the recent launch of my new Cabot Early Opportunities investment advisory in September I’ve been spending more time looking at IPOs. Today I want to zero in on three recent IPOs to buy now.
But before we get to the stocks, a couple quick general notes on investing in IPOs.
First, what we’ve seen recently is that the bulk of IPO gains are coming on their first day of trading. That means there’s no rush to buy into these stocks. You can’t get the same price as the big institutional buyers on day one, so don’t bother trying. But you can average into a position in the weeks and months after a company goes public. And because IPOs frequently pull back to near their IPO price, your patience will often be rewarded.
Second, it’s critical to recognize that a company doesn’t go public because management just wants to expand the investor base to include you and me. An IPO is usually a liquidity event that allows early investors to cash out part, or all, of their investment. Or, it’s a capital raising event that will raise money to keep the business running (not the ideal scenario for new investors) or fund growth initiatives (much more compelling, in my opinion).
Another scenario is the spin-off scenario, which isn’t so much an IPO as it is the creation of a pure-play public company that was previously a business unit within a much larger organization. These are often interesting opportunities because spun-out businesses are free to go it alone and seek out their best future, not work within the confines of the company they used to be a part of.
Finally, when investing in IPOs or spin-off stocks, don’t get hung up on trying to trade the stock and get in at the very best price with one purchase. That’s not going to work out with any consistency. In the early days there’s not going to be any stock chart worth analyzing, so it’s far more important to focus on the business and business model, whether you like it or not, and where the business is likely to go in the future. Then average into the stock over time to spread out your cost basis, preferably after the stock has pulled back and is looking stable, or has started to develop a modest uptrend.
3 IPOs To Buy Now
With that out of the way let’s turn to some recent IPOs that are in the depths of a post-IPO selloff and could be attractive businesses to start buying now.
IPOs to Buy Now: Ping Identity (PING)
Ping Identity has a market cap of $1.2 billion and provides identity solutions, including single sign-on, multi-factor authentication, access security, directory data, governance, and API intelligence. You’ve likely noticed and been forced to go through single-sign and multi-factor authentication processes on your electronic devices. Ping Identity is one of the companies making this happen. It is mostly a subscription business and in 2018 generated 77% of revenue from within the U.S. Expansion efforts in Europe are ongoing.
Customers include over half of the Fortune 100, the 12 largest banks, eight of the largest 10 biopharmaceutical companies, four of the five largest healthcare plans and five of the top seven retailers. Specific customer names include Netflix, HP, Applied Materials, Scotts Miracle Gro and GlaskoSmithKline. Analysts are looking for revenue to be up around 14% this year and 13% in 2020. Ping Identity should be profitable this year too, with adjusted EPS of $0.35 expected.
The company just went public at 15 on September 19. After an initial surge as high as 21, PING has slid back and now trades just above its IPO price. PING has been moving sideways in the 15.5 to 17.5 range since the beginning of October. If this is something that you’re interested in you could take a small starter position around this level, and then average up or down depending on how things unfold.
IPOs to Buy Now: Bellring Brands (BRBR)
Up next is Bellring Brands (BRBR), a company that was spun out from Post Brand (POST) just a couple days ago, on October 17, and came public at 14. Bellring Brands has a market cap of $560 million. You’re likely familiar with Post, which is the cereal company that makes Raisin Bran, Honey Bunches of Oats, Grape-Nuts, Pebbles, and so on. Post has a market cap of $7.4 billion and has been a solid performer since it went public in 2012.
Bellring Brands was spun out to hold three main groups of products: ready-to-drink protein shakes (74% of revenue), powders (14% of revenue), and nutrition bars (12% of revenue). The three brands that you might recognize are Premier Protein, Dymatize and Powerbar. The business is fairly concentrated within Costco and Walmart and their affiliates, which collectively accounted for 71% of sales in 2018. We don’t yet have good consensus estimates for the future. But in 2018 revenue grew by 16% to $827.5 million and adjusted EPS of $2.70 was up 80%, so I think it’s fair to expect mid-teens top-line growth this year. The stock came public at the low end of its proposed range and is trading above its IPO price now.
IPOs to Buy Now: Datadog (DDOG)
Datadog (DDOG) came public at 27 on September 19 and has a market cap of $8.3 billion. The company provides infrastructure monitoring solutions. The big-picture trend here is that everything is going to the cloud, and as companies use more cloud-based solutions to automate their businesses they need software to monitor all these solutions. That’s where Datadog’s infrastructure monitoring, application performance monitoring and log management solutions come in.
It’s a huge market that analysts see being worth around $5 billion right now. Datadog isn’t the only player out there. But it is one of the best positioned to grow and if you just look at the numbers you can see that analysts are bullish on the company’s prospects. Revenue was up 97% in 2018 and is seen rising 67% in 2018 and 42% in 2020. The company is not profitable but this year’s projected EPS loss of -$0.30 should be cut in half in 2020. The stock shot almost 40% higher on its first day of trading when it closed just shy of 38. But shares have pulled back and at 28 now DDOG is trading just a couple dollars above its IPO price.
As I mentioned earlier, there’s no rush to jump in with both feet with these stocks, or any IPOs for that matter. These three just came public and there’s no stock trading trend to speak of. But if the businesses are appealing to you, do a little more digging and if you like what you see start off with a small starter position, then ramp it up over time.
Tyler Laundon is chief analyst of Cabot Small-Cap Confidential. The circulation of Small-Cap Confidential is strictly limited because the undiscovered stocks with sky-high-potential that Tyler recommends are often low-priced and thinly traded. Don’t share these recommendations!Learn More