Monday, November 13, 2006

IPO Plays This Week

I started trading IPO's about a month ago. Statistically, IPO's perform the best during the last quarter of the year, so I thought it was a good time to start looking into this dynamic asset class. I say dynamic because these plays offer strong fluctuations from one day to the next. If you know what to buy, and when exactly to sell it, you can make a lot of money. Since this is one of the most publicized IPO weeks of the year, it is a perfect time to share my IPO picks of the week.

The most mentioned IPOs this week include the rental car company Hertz (HTZ), the Halliburton spin-off KBR (KBR), and the commodity exchange Nymex (NMX). So which one(s) should you play?

Hertz rental car may seem like a safe play (steady revenues, incremental growth, and legitimate expansion plan); I am concerned about the scalability of the rental car business as a whole. Thrifty, arguably Hertz' most notable competitor, has seen diminishing profits for several consecutive quarters. I feel that if you are going to play this IPO, get ready to get out in the short run. I look for a maximum of an 8% increase sometime during the first week - get out at that point. A competitive, diminishing market is not a long term play. Decision: Pass.

While KBR will likely be more volatile that Hertz, I feel that the stock has stronger earnings potential. This company's financials and growth potential are astounding (revenues over 9 billion and demand for oil should increase sometime shortly). One weakness is USA's potential withdrawal from Iraq. KBR has substantial construction business in Iraq and a U.S. withdrawal could pose problems for the company. The answer: play this one short term. The U.S. may remove troops from Iraq, but the country still needs to be repaired, yielding plenty of business for KBR. Decision: Play.

This is the big one. Nymex is a commodity exchange with huge growth potential. Many investors have been salivating over this release, but there are some evident flaws. The over-hype and massive participation could push the open price of this IPO up to $150/share. By this time speculative investors could sell their shares and drop the price significantly. While the share price may deter some investors, there are many reasons to invest in NMX. I like the company's strong financials (Almost 120M in profits) and successes from similar IPO exchanges (NYX, CME and BOT). The positives outweigh the negatives, so the question is how to play NXM? While there is potential to make money buying and selling on highs and lows, I feel the best strategy is buy it and never look at it again. Decision: Play.

CNN Article

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