Are These Top Post-IPO Performers Still a Buy?

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Investors are no stranger to large IPO pops, but in the last year we have seen incredible post-IPO runs, indicating that these companies were priced too cheap. Thus I am looking at the top five to determine if more upside exists.

#5 Ambarella (NASDAQ: AMBA)

Since its IPO on Oct. 10, 2012, the technology company Ambarella has rallied 154.6%. Currently the stock is trending higher and is just $0.74 from reaching new highs of $16.00. With that said, this is a company that is trading at just 3.40 times sales and 25 times earnings.

The company has sales growth of more than 25% and continues to see margin improvements. Thus I say that it is very possible that this large post-IPO performer continues to tick higher.

#4 Chuy’s Holdings (NASDAQ: CHUY)

Chuy’s is a restaurant serving what it calls “Tex Mex” food, and its growth has been remarkable. As a result of its 25% top-line growth, the stock has responded with a 156.54% post-IPO gain. Despite these gains the stock trades at just 3 times sales and 60 times earnings (with margins rapidly improving).

My only problem with the company is that its comparable store sales are only growing 2.30%, meaning most of its growth comes from expansion. With that said, the stock is still cheap for a company with 25% top line growth, hence I’d still be a buyer.

#3 Tesaro (NASDAQ: TSRO)

Tesaro is a zero-revenue-producing clinical stage biotechnology company that has gained 166% since its IPO. The company’s lead product is Rolapitant, a Phase 3 drug for nausea and vomiting associated with chemotherapy. Then, it has an early stage drug that treats breast and ovarian cancers, which is far from an FDA approval.

The problem is that this developmental company trades with a valuation over $1 billion and seeks stiff competition from Merck if its drug Rolapitant makes it to market. Therefore, with limited sales potential short-term, I’d say sell this rally.

#2 Shutterstock (NYSE: SSTK)

Shutterstock is a marketplace for commercial digital imagery, and has seen its valuation increase 190.12% since its IPO. The company is growing at about 35% year-over-year, and has both strong margins and consistent improvements in margins. The stock trades at 47 times next year’s earnings and 9 times sales, hence I do think it is a bit expensive compared to growth.

Both Ambarella and Chuy’s have high 20% growth and trade at just 3 times sales, therefore I don’t think Shutterstock is worth the premium.

#1 SolarCity (NASDAQ: SCTY)

No other post-IPO performer even comes close to the gains of SolarCity, a stock that has rallied an incredible 462.50%. The company is engaged in the design, installation and sale or lease of solar energy systems to residential and commercial customers.

While this could eventually become a highly lucrative business, it is currently producing growth of less than 25%. Furthermore, the company is nowhere near profitable, having operating margins of negative (53.52%). Thus I can’t find any reason to buy after this rally, especially considering its price/sales ratio of 21.0. The stock is simply too expensive.

Conclusion

I explain in my book, Taking Charge With Value Investing (McGraw-Hill, 2013), that contrary to popular belief, IPOs can offer some of the best opportunities in the market. Of course this is dependent upon the industry, but companies that decide to become public are usually at exciting times in their history and then have large amounts of cash to invest in the company from the IPO. With that said, you must continue to monitor such companies, and be ready to take profits if a stock becomes too expensive (hence SolarCity). Overall, it’s a market that investors should explore with immense interest. 

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Brian Nichols has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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