Palm (NASDAQ: PALM) shares rose 8 percent on today fueled by rumors that bigger rival phone maker Nokia may be eyeing the maker of the Pre and Pixi smartphones. "Palm shares leaped and its call volume surged to 9 times their normal level as more than 80,000 call contracts traded by midday on renewed takeover speculation. Representatives for Palm and Nokia were not immediately available to comment after Palm shares rose 8.1 percent to $12.38 in afternoon trading on the Nasdaq. -Reuters

Two private-equity owned U.S. retailers, discounter Dollar General Corp. (DG) and youth apparel chain rue21 Inc. (RUE) rose in their trading debuts today, in performances that will soothe worries that investor appetite for buyout-backed initial public offerings has waned. Shares of Dollar General rose as much as 10 percent on the New York Stock Exchange, while rue21 advanced as high as 28.4 percent on the Nasdaq, placing it on pace for one of the biggest first-day jumps of an IPO this year. In afternoon trading, Dollar General shares were quoted at $22.77/share, or up 8.4 percent, while rue21 was up 28.4 percent, trading for $24.40/share. -Daily Finance

In theory, Dollar General shares should perform well in this weak economy. With nearly 9,000 locations in 35 states, the company is a favorite of cost-conscious consumers. Dollar General competes with stores like Walmart (WMT) and Kroger’s (KR) Fred Meyer subsidiary by offering both name-brand and generic items at reasonable prices. Selection ranges from groceries to home decor.

Dollar General targets households with a median income of less than $75,000 per year, making it a direct competitor to Walmart, but this competition doesn’t appear to be hampering Dollar General’s earnings power. In October, the company said its fiscal second quarter profit more than tripled thanks to better margins and an 8.6% surge in same-store sales. The company also plans to increase store openings and remodel certain locations. Oddly enough, Dollar General has no stores in California, the largest state by population.

That’s the good news; now, what could go wrong? First, with IPOs it is always a good idea to ask why the owners are cashing out. Private equity firm KKR and Goldman Sachs bought Dollar General in a leveraged buyout before the credit crisis unfolded, leaving the company saddled with more than $4.1 billion in debt. That’s an enormous sum under any circumstances.

The company expects to raise $750 million in the IPO. Nearly $478 million of those proceeds will be used to redeem debt. The company had a cash balance of $515 million at the end of July and paid a dividend of $239 million in September. (No word yet on whether Dollar General will pay a dividend upon going public.) It’s a cash cow so long as the debt load can be managed and eliminated.

Dollar General has had 20 consecutive years of same-store sales growth. Its stores are typically cash flow positive within a year of opening. Those are positive signs and could mean this discount retailer won’t trade at discount prices for very long. To buy into a Walmart alternative that targets cost-conscious consumers, go with Dollar General. You may not be able to buy at the IPO price, but the shares will be available to the public soon.

Brandon Clay
Invest With An Edge

Part of the tech gain is related to how new media companies are categorized. Some of the stocks that make up the sector probably don’t belong there. Companies like Google (NASDAQ: GOOG), Ebay (NASDAQ: EBAY), and Mastercard (NYSE: MA) are considered tech stocks. The first two inherited the space because they are more internet-based than other companies. However, Google is more like a giant newspaper that gets its revenue from advertising. Like other media companies, GOOG might fit better in the Consumer Discretionary group. Ebay is an auction house – same thing. Mastercard is a credit card company but for some reason is not listed as a Financial. Yet all three companies contributed to the dramatic rise of the sector this year. Technology is more diversified than it looks.

Another Consumer Discretionary-like stock may soon be added to Technology sector: Facebook. Although not yet public, Facebook is heading toward an IPO. In September, Facebook announced it was cash-flow positive, making enough money to cover the expenses of its 300 million users. This is more than can be said for Amazon (NASDAQ: AMZN), which had negative cash-flow for years after going public.

Facebook is a a social media company. For those not yet in the club, Facebook allows users to build personal web pages and connect to “friends” in the network. According to Alexa.com, Facebook is now the 2nd most visited website on the planet – just behind Google. It’s big, it’s growing, and it’s almost surprising that it took so long for the company to make money.

In September, we told you how to buy a few other tech stocks in the media space. Today, we offer another way to get into social media before Facebook’s IPO. Last year, Facebook started allowing employees to sell stock. This helped open a secondary market for their pre-IPO stock. If you want to buy Facebook stock before their IPO, check out two sites that specialize in these sorts of transactions: Sharespost & SecondMarket. This isn’t a recommendation, just a tip. Buyer beware.

Brandon Clay
Invest With An Edge

Disclosure compliant with FTC 16 CFR Part 255 covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

What if I told you I’ve found a relatively small company shaping up to be one of the future leaders in the lithium/hybrid car battery industry?

You’d be somewhat interested, right?

Well, what if I also to you this is not your average battery company. Its battery technology was developed at MIT. It was originally financed by Sequoia Capital – the same early investors behind YouTube, Cisco, eBay, Yahoo, etc. It has a close relationship with General Electric. The U.S. government has already cut a $249 million check to help it ramp up production. And finally that Morgan Stanley and Goldman Sachs were going to be big supporters.

You’d certainly be a little more than interested, right?

Well it’s a real company. I’d say it’s the best “story stock” to hit the market in a long time. More importantly, it proves how you can align your interests with Wall Street’s to ensure the big money players have a personally vested interest in making you money.

As Easy as A-1-2-3

The company is A123 Systems (NASDAQ:AONE). Its first day of trading was yesterday. The IPO was for 28.1 million shares priced at $13.50 a piece. The first shares traded hands at $17 – good for an instant 26%. Then it climbed to more than $20 per share through the rest of the day.

A few months ago I told readers of Prudent Investing it was going to be a hot one. And with a 50% gain on day one, A123 did better than even the most optimistic of us who have been covering this story for a while would expect.

There are two very important points to take-away from the strength of this IPO.

First, this IPO just shows how truly strong the demand is and will be for shares in the hybrid car battery markets. After the IPO there were more than 98 million shares outstanding. As of today, the company with no proven product, no major sales contract (GM actually passed on A123’s batteries for the Chevy Volt), very little production capacity, and no near-term prospects for profitability, sports a market cap of more than $1.9 billion.

Second, Wall Street desperately wants – maybe even needs – a scorching hot IPO.

The Best Paydays for Wall Street

Wall Street makes quick, relatively easy money from IPOs. The usual fee is anywhere from 5% to 7% of the total value of the IPO. In fact, the largest Wall Street firms collected more than $8.9 billion in underwriting fees for bond issues, IPOs, and secondary share offerings in the past three months.

Also, their top clients like mutual funds and hedge funds make sizeable gains from IPOs too. A trader
at a mutual fund can place trades anywhere. But in exchange for sizable IPO allocations, they’ll be more likely to trade for the firm handing them the quick, low-risk win (it falls under the “soft dollar” umbrella like buy-side research).

A successful IPO is a win/win. And whether the markets are up or down, everyone is always looking for easy wins.

As a result, they all have a vested interest to ensure a few very successful IPOs to get this lucrative win/win market rolling again.

That’s why I expect shares of A123 to not just hold up, but to trend steadily higher. The IPO has taken a great first step, but if the shares can hold onto their gains for another month or two, the IPO would have to be considered a success. This success will lead to many more IPOs – especially ones from the green sector. There are hundreds of companies in need of capital and, as I expect the performance of A123’s shares over the next few weeks to prove, there’s plenty of investment demand for the green sector.

Rigging the Market for Yourself

In the end, yesterday’s big move in A123 shares is a bit bigger news than most of the headlines are giving credit.

A successful IPO is going to go a long way to getting this lucrative market going again. A123 must be successful to unlock a dozen more green energy deals, a dozen solid “overnight” gains for highly-valued clients, and millions in commissions for the investment bankers. The IPO market has been slowly coming back, but it’s still not anywhere close to what it once was.

(Side note: I’m a big believer in A123’s speculative potential. There are no earnings and no real way to value it. At this price, however, it may be an “OK” trade and it’s certainly not a truly “great” low-risk, high reward trade we look for here in the Prosperity Dispatch. Basically, you’re risking 50% to make 50% here. Risking $1 to make $1 is not going to cut it for successful investors).

Again, this IPO proves the interest in batteries and, as you’ll see over the next few years, there is a lot of demand for anything green. This is something we’ll go over in the days and weeks ahead (I recently sat down with one of the world’s foremost battery scientists in the world for the full scoop –
full transcript from a batter insider is on its way).

The most powerful interests in the world are aligned around green energy. Labor, government, and Wall Street are all on board. And there’s still plenty of time to get in before the big gains will be had.

There’s one more. We all know by now Wall Street is pretty much rigged. Most shares are overpriced and it’s all a matter of timing, value, and being in the right spot before other investors start to pile in. So you can sit back and complain about it being a “rigged” game or you can learn how to play it and go along for the profitable ride.

The A123 Systems IPO proves there are ways you can align your own interest with Wall Street’s interests as long as you know how they work.

As an investor you’re going to have to make a choice. You can try and beat the system or you can put it to use for you. It should be obvious which most successful investors do.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Tuft, a 33-year Goldman vet who co-founded its equity capital markets business in 1985 and became its chairman in 2004, was involved in several high-profile IPOs, including those of The Estee Lauder Companies Inc. (NYSE: EL) and RJR Nabisco Inc. He also advised Lazard on its own IPO in 2005.

A slowdown in mergers and acquisitions has prompted Lazard to expand its equity capital markets and restructuring operations, working on nine of the top 10 bankruptcies this year, Bloomberg News reported. Capital raised by IPOs in the first half of this year was $11.4 billion, down 85% from the same period last year according to data compiled by Bloomberg.

“There is demand for companies to come public,” David Menlow, president of IPOFinancial.com told Bloomberg. “The fact that we haven’t seen that many is not an indication that companies are not out there ready to come public.”

There have been 21 IPOs this year, compared to hundreds from a few years ago. Still, companies continue to go public in this uncertain economic environment, including big-name companies like Dole Food Co. Inc. and Hyatt Hotels Corp.

The pace of IPOs will likely rise to about three a week on average, as long as the economy remains stable and the market doesn’t deteriorate, University of Florida finance professor Jay Ritter told The Associated Press. Ritter attributed his estimate to a similar period in 2003 to today when the economy was making its recovery from the dot-com bubble burst of 2001.

Even in this economy, there have been several IPO success stories. Rosetta Stone Inc.’s (NYSE: RST) April IPO of $18 a share netted investors a gain of 39%, closing at $25.12 on its first day of trading. The average return on investment of IPOs in 2009 has been about 28%, advisory firm IPO Boutique Senior Managing Partner Scott Sweet told The AP.

“There is demand,” Sweet said, “and people are saying, you know, these are working.”

It’s not all smooth sailing for the companies that went public this year – after all, the current recession is worse than any one before it since the Great Depression. Rosetta Stone is one example of this: Since its strong IPO, shares are down more than 18%, and the company recently canceled its secondary public offering after it lowered its guidance for the current quarter.

The “Silicon Valley Six”

An informal poll of venture capitalists and others conducted by Reuters yielded six successful companies with revenue of $100 million or more in Silicon Valley that are ripe for acquisition or an IPO, excluding social networking sensations Facebook Inc. and Twitter Inc. The news service dubbed the companies the “Silicon Valley Six,” which were chosen out of 34 citied in sectors ranging from alternative energy to video games.

The top four companies found were social network LinkedIn Corp., solar panel maker Solyndra Inc., smart grid company Silver Spring Networks and Zynga Inc., which develops games that run on social networks like Facebook or New Corp.’s (NYSE: NWS) MySpace.

The other two are Guidewire, which develops software for property and casualty companies, and LiveOps, which operates call centers from contractors that work from their homes.

“They are exciting because they…demonstrate what is possible with venture capital,” Sharon Wienbar, managing director of Scale Venture Partners told Reuters. “These are companies that have proven a new, attractive business model that works big in spaces.”

Venture capitalists’ rule of thumb for declaring a company ripe for an IPO is that a company must have  $100 million in sales and have a capitalization of about $1 billion in order to have enough money to meet the reporting structures of the Sarbanes-Oxley act.

“The market is in the early stages of being back,” LiveOps Chief Executive Officer Maynard Webb said. “The market is ripe and open today for great companies.”

While not mentioned in Reuters’ “Silicon Valley Six,” one private company that’s making waves in Silicon Valley is PopCap Games Inc., which publishes and develops easy-to-play, accessible “casual” video games.

The company recently appointed Robert Chamberlain, a finance veteran that arranged IPOs for several tech companies, as its new chief financial officer.

"[Chamberlain will] oversee a sizable team of finance and accounting professionals while also providing critical expertise to our overall expansion plans,” said PopCap CEO Dave Roberts, without alluding to a public offering.

Still, PopCap has been self-funded since its inception in 2000 and has no immediate plans for a public offering, spokesman Garth Chouteau told Money Morning in an e-mail.

“Bob’s long track record and extensive experience will be valuable to us if and when we seek some form of ‘liquidation,’” he said.

By Bob Blandeburgo
Money Morning

P.S. This Report Will Change How You Invest…Forever

Keith Fitz-Gerald’s new report is out and generating huge buzz among Money Morning readers. A few years back, Keith made some discoveries that turned his views on investing upside down. Changed everything. Now he’s got some hard numbers from the recent market that prove his new theory is right. The report isn’t just theoretical, though. Keith shows you how you can apply his thinking to your own portfolio. Click here for the report.

Sure the tally stands at a pathetic six. But with over 100 deals waiting in the pipeline, the uptick is being closely watched.

Even more so, considering that last week’s debut of Digital Globe (NYSE: DGI) – a provider of satellite imagery used in Google Maps and Microsoft Virtual Earth – garnered interest reminiscent of the IPO heydays in the late 1990s.

Heck, it broke into Google’s Hot Trends list, meaning it was one of the fastest-rising search terms in the world. (That’s no small feat considering it meant beating out pop culture search mainstays Britney Spears, Ashton Kutcher’s twitter record and Desperate Housewives spoilers to name a few).

However, I’ve learned hype seldom translates into profits in the IPO space. In fact, I revealed that I was skeptical about the Digital Globe IPO from the outset.

Sure enough, the aftermarket performance only confirmed my suspicions. Despite pricing above the projected range at $19, and rallying in the first few moments of trading, the stock is now in negative territory.

Nevertheless, the buzz is building about another tech IPO this week. But it, too, should be avoided. Let’s take a look at why. Then I’ll share my proven formula for sifting through the IPO hype to find sure-fire winners.

Tech IPOs: Cancel Your Reservations at OpenTable

On Thursday, the tech IPO, OpenTable (Nasdaq: OPEN) a provider of online reservation services for restaurants, will begin trading.

As a frequent user, I’ll concede it’s a convenient service. In a few keystrokes I can guarantee a table at my favorite sushi restaurant, instead of waiting on hold forever or getting an answering machine. And it’s free.

Don’t worry. This isn’t some dot-com company with a clever idea and no revenue stream. It makes money by charging restaurants one-time installation fees (avg. $1,200), monthly service fees (roughly $260) and $1 for every reservation.

A novel concept, for sure. That’s probably why so many investors want a piece of the deal.

Yesterday morning, underwriters increased the pricing range by 31% to $16 to $18. Such a big bump only happens when a deal is oversubscribed.

Why The OpenTable Tech IPO Will Be A Dud

Don’t be so quick to book a seat at this tech IPO, though…

• We all know the restaurant industry relies on the consumer to thrive. In such an abysmal spending environment, OpenTable’s growth initiatives will certainly be hampered.

   

• Speaking of growth, it’s limited. OpenTable already counts 9,500 of the 30,000 reservation-taking restaurants in North America as customers.

   

• The best IPO returns come from companies with endless growth potential… Think Starbucks (Nasdaq: SBUX), Chipotle Mexican Grill (NYSE: CMG), or Wal-Mart (NYSE: WMT) in their infancy.

   

• Plus, barriers to entry for new competitors are low. And consumers can switch allegiance with a click of the mouse, meaning market share can erode before any efforts to combat it can be concocted.

   

• Making matters worse, the company’s struggled with profitability, reporting operating losses in four out of the last five years.

   

• If that wasn’t enough, the valuation is completely out of whack. At the midpoint of the proposed pricing range, shares would be valued at 6.4 times 2008 sales. The average company in the S&P 500 only trades at 1.8 times sales. Even more glaring, OpenTable’s initial price-to-earnings ratio would be a whopping 106!

Even the village idiot knows that’s frothy.

Don’t overlook what insiders are doing either. They’re cashing out 1.4 million shares, equal to almost 50% of the total offering. On average, insiders cash out less than 30%. Seems like they’re tipping their hand about the company’s shaky growth prospects.

We’ll be getting our answers regarding OpenTable shortly. Regardless of whether it soars or dives, the fact that it successfully debuts will usher in more IPOs in coming months.

Three Steps to IPO Success in Any Market

Here are three key steps that I would insist on before buying IPOs in any market:

• Profitability. Sounds obvious, but most companies that flop in the aftermarket lack earnings. Insist on at least two years of profitable operations.

   

• Long-Term Growth Potential. The reason IPOs can be so darn profitable is because they represent the opportunity to invest in the infancy of a company’s growth cycle. Accordingly, focus on companies with verifiable long-term growth potential. Stick to companies with a market potential that points to a decade or more of heady growth.

   

• $50 Million or More in Annual Revenues. Research out of the University of Florida confirms revenues are a good predictor of stock performance. The key threshold is $50 million for the 12 months prior to an IPO. Companies below that level underperformed the stock market by a margin of 15% for the next three years. Those above it outperformed.

One more thing, IPOs are just like any other investment. Ultimately, fundamentals win out in determining share prices. So, after confirming the three characteristics above, take some time to dig into the underlying business. The stronger the fundamentals, the greater the profit potential.

Good investing,

Louis Basenese,
Investment U

Scan the financial markets and very little – if anything – is consistently moving in a positive direction. And the latest economic data – unemployment, home foreclosures, bankruptcy filings, consumer spending – only underscores how far and wide this recession is cutting.

One thing, however, keeps chugging along, undeterred – innovation…

Innovation Will Lead The Economy’s Recovery

“Innovation goes up while the economy goes down,” says W. Chan Kim, Fellow of the World Economic Forum. And history suggests he’s not wrong. In 1969, while the economy slumped 1.9%, the number of patents granted jumped 14%.

During the energy-induced recession of the early 70s, unemployment hit 9%. GDP dropped 4.7%. And yet innovation handed us major breakthroughs in recombinant DNA and the Internet.

Recessions have served as the catalyst for the launches of more than a few innovative and now iconic brands like, Trader Joe’s (1958), MTV (1981) and the iPod (2001).

That’s why I’m going “all-in” and proclaiming this go-round will be no different – innovation will again lead the recovery. And the best way to play it is via IPOs.

IPO Activity Mirrors The Markets

We all know IPO activity mirrors the broad market. During rallies, companies flock to market like an autograph-hungry teenybopper at a Jonas Brothers concert. And during slowdowns, the IPO space is as lonely as a geek on prom night.

No doubt, we’re witnessing the latter.

• In the first quarter, just two IPOs made it out the door. And only five companies filed plans to go public. Seventeen companies bagged plans altogether, filing withdrawal documents with the SEC.
• But historical precedent tells us that IPOs are the place to invest coming out of a slump. They represent the rubber hitting the road for the innovative products birthed during the throes of recession.
• What’s more, the profit potential is most pronounced coming out of periods of prolonged sluggishness, like we’re experiencing now.

For proof, all we need to do is go back to the last “severe” recession on record, from 1973 to 1975.

Back then, we were contending with oil embargos, inflation, Vietnam, Watergate, soaring unemployment, among all else. Granted, conditions weren’t as severe worldwide as today, but they were close.

In fact, President Gerald Ford began the 1975 installment of The Economic Report of the President with lines befitting the current environment, “The economy is in a severe recession. Unemployment is too high and will rise higher.”

The IPO Market Explodes With Opportunity

Yet, beginning the very same year, at the peak of the doom and gloom, the IPO market exploded with opportunity. From 1975 to 1979, IPOs returned almost 140%, or 34% annually, enough to almost quadruple the gains of the Dow over the same period.

Of course, the standout innovators faired even better.

• Companies like Cray Research, inventor of the first supercomputer, popped 29% in its very first day of trading. And the move persisted – the stock rose another 63% in its second year as a public company.
• In similar fashion, overnight shipping innovator, Federal Express, also jumped 29% on its trading debut. And it, too, continued on a northward course in its second year of trading (shareholders bagged 318%).
• Likewise, St. Jude Medical stormed the markets with a 79% gain out of the gate. Shareholders netted a 514% profit in the second year.

You’ll notice, I’m not likening these gains to the fleeting returns that defined the dot-com boom, when IPOs jumped 300% or more in a single day, only to crash in a similarly spectacular fashion. (Think eToys. It popped 280% on its first day of trading, only to file bankruptcy two years later.)

Instead, I’m talking about sustained, meaningful, multi-year, triple-digit gainers that – in light of the recent market turmoil – are welcomed prospects for any investor.

Finding IPO Opportunities Around The Next Economic Bend

Even better, such IPO opportunities could be just around the next bend. In recent weeks, we’ve seen a few IPO greenshoots pierce the barren earth in IPOland.

• On April 2, a China-based online game provider – Changyou.com – made its stock market debut, rallying 25.1%.
• The same week, two innovative companies – Rosetta Stone and Bridgepoint Education – announced pricing terms, the last step before a public debut.

As long as underwriters take their cues from the Changyou deal – it was priced at a 40% discount compared to publicly traded peers – I expect the IPO rebound to really take root. And there are certainly enough companies to fuel it.

Despite 97 withdrawals in the last year, the IPO pipeline remains stacked with over 100 companies, including a three in particular that I’m tracking closely:

• Emdeon,
• Liquidnet Holdings,
• And A123 Systems.

Any investor savvy enough to pay attention to this lucrative, yet almost forgotten space will likely be rewarded handsomely.

Bottom line, if history is any guide, 2009 will likely be a very profitable year for IPOs. So for now, just keep an eye on the activity at the SEC’s website.

Louis Basenese
Investment U

Investment activity was down 47% from the $5.7 billion invested in 866 deals in the fourth quarter last year, according to research by the non-profit National Venture Capital Association (NVCA) and PricewaterhouseCoopers LLP.

“Given the economic turmoil that began in the third quarter of 2008 and continued on into 2009, it’s not unexpected that the (venture capitalists) would pause to assess the impact on their portfolio companies before again looking forward to their next investment,” Tracy Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers, said in a news release.

Declines plagued nearly every sector – both in the total amount invested and the number of deals.

Software companies received the highest level of funding, with $614 million invested in 138 deals. But that was still a 42% drop in dollars invested and a 34% drop in total deals compared with the fourth quarter of 2008.

Clean-technology (alternative energy, pollution and recycling, power supplies and conversion) was the hardest hit sector, as investment fell 84% to $154 million in 33 deals from a record high of $971 million in 67 deals in the fourth quarter last year.

The financial services sector was the only one that saw an increase in dollars and deals – taking in $108 million from 17 deals, increases of 26% and 21%, respectively.

In addition to having considerably less money to invest, venture capital investors were also weary of investing in new companies and technologies that couldn’t promise a short-term return.

Instead, they spent their money on companies and sectors they already own, John Taylor, vice president of research at National Venture Capital Association, told Bloomberg.

“We are in a very difficult, stressed time,” Taylor said. “Everyone is trying to figure out what is going on.”

The investment drought in clean-tech could bottleneck the sector, as ready-for-market technologies can’t get out of the lab.

“We are continuing to see a lot of innovation coming out of universities and government labs, but the big challenge looming is how any of these will be scaled and who will pay for them to see the light of commercial day,” Noubar Afeyan, chief executive of Flagship Ventures, told The New York Times.

Mark Heesen, president of the NVCA, wasn’t entirely pessimistic over the figures. Venture firms with the ability to invest are pulling the trigger on capital-starved entrepreneurs with “game-changing” technologies, he said.

“While this drop in investment is significant, we are not forecasting levels to continue to fall further,” Heesen said. “We would expect a mild and steady increase in investment throughout the rest of the year, particularly if the exit pipeline is allowed to clear.”

Two recent deals gave hope to the static initial public offering (IPO) market.

Shares of language instruction software titan Rosetta Stone Inc. (RST) rose about 40% on its first day of trading, netting the company $112.5 million. And online college Bridgepoint Education, Inc. (BPI) rose 7% on its opening day of trading, reeling in $141.75 million from its initial stock sale.

Both companies’ shares continued making gains for the rest of the week after their IPOs.

By Mike Caggeso
Money Morning

Last week, we got the most bullish indicator for a small-cap rally yet. However, most investors didn’t catch it. And it received scant attention in the financial press, too.

But ignoring it could be a big mistake, as it could usher in the first round of sizeable small cap gains (50% or more). And I certainly don’t want you to miss out, so let me bring you up to speed…

We all know most investors abhor risk right now. That’s why they’re buying Treasuries at a zero yield, hoarding gold, or sitting in cash. And that cash pile rests at an 18-year high of $8.85 trillion, according to Bloomberg.

And who can blame them? Given the economic backdrop of soaring deficits, terrible earnings and a flat-lined housing market (to name a few issues), a little certainty in an uncertain world should be coveted.

Small Cap Gains: 5 IPOs in One Week IS a Big Deal

Here’s the thing – such an understandably risk-averse sentiment makes it all the more unbelievable that five IPOs are slated for next week.

That’s not a typo. Five companies plan to price initial public offerings next week. And that just defies every ounce of conventional wisdom.

You see, without fail the IPO market has always mirrored the broad market. In bull markets, the deals come fast and furious. In bear markets, they don’t come at all. Clearly, we’re still in a bear market. So why then the flurry of activity, after a 10-week layoff? (The last IPO to grace the markets was Grand Canyon Education (Nasdaq: LOPE) on November 20).

I don’t know. But the “why” doesn’t matter. What matters is the “how” – as in, how will they perform?

5 Deals = Shift In Investor Sentiment Towards Risk

If all five deals get out the door – that is, if the underwriters don’t postpone or cancel them at the last minute – it will signal a dramatic shift in investor sentiment and their appetite for risk.

Sorry, but there’s no denying buying a young company, with untested prospects, in the throes of a bear market is risky behavior. It redefines risky in this market. It’s the equivalent of someone cashing in their unemployment check, with three hungry kids at home, and instead of the grocery store, heading straight to Vegas – to play at the high limit tables, no less.

But we shouldn’t question the reasons behind the potential shift. We should just monitor it. As I’ve learned countless times, even subtle shifts in investor sentiment can lead us to big profits.

In fact, studying shifts in sentiment is what originally led me to recommend going long the U.S. Dollar last March, short oil last June and short Treasuries just over a month ago. Each of which were downright unthinkable trades at the time. But undeniably profitable.

So let me be perfectly clear. If you do nothing else next week, at least keep an eye on the IPOs. If they perform well, it’s time to go “all-in” on small caps. And that’s simply because all five deals are small caps. And if investors are willing to take a big risk on five unproven small stocks, they will certainly start taking risks on small caps with proven business models and quarters worth of double-digit earnings growth.

If you want to read up on each deal, I recommend you go to www.retailroadshow.com and check out each IPO prospectus and presentation. If that’s of no interest to you… or you’re just strapped for time, no bother.

Focus on This IPO Pair For Small Cap Gains

Only two IPOs next week really matter for small cap gains:

• The O’Gara Group (Nasdaq: OGAR proposed)
• And Mead Johnson Nutrition Company (NYSE: MJN proposed).

Both sport solid growth fundamentals, possess significant competitive advantages, operate in underpenetrated multi-billion dollar industries, and are profitable – a rarity for most IPOs. They are the cream of next week’s IPO crop, and the ones that would normally attract the most investor interest.

And here’s what I’ll be looking for specifically. Each IPO should:

• Price at the midpoint of the proposed range or higher.
• “Pop” or increase in price once trading begins.
• Close the day above the offering price.

If all three happen for either one of these deals, it will confirm that both institutional demand (they’re often the only ones that get to purchase an IPO at its offer price) and individual investors are warming up to risk in a big way.

And coupled with all the data I’ve provided about small cap stocks and small cap investing, that’s a telltale sign that the small-cap rally I’ve been predicting, which always accompanies the end of a recession, is underway.

Again, if you do nothing else next Wednesday, February 11, monitor the price action in OGAR and MJN. And treat a strong debut by either as the last call to invest in small caps before they make their big move.

Good investing,

Lou Basenese
Investment U

But emerging market IPOs have flourished, accounting for 70% of the total value of public offerings worldwide since April 1.

Globally, the number of IPOs during the second quarter fell by 56% to 205, while the amount of money raised through IPOs fell 64% to $31.5 billion, according to data from Dealogic.

However, that steep decline was largely the result of a collapse in more advanced, Western economies.

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The number of deals in Europe, 66, was down 57% from the same period in 2007. The number of IPOs in North Asia, excluding Japan, toppled 37%, from 59 to 37. And the United States suffered the most, with U.S.-listed IPOs dropping 80%, from 56 offerings last year, to just 11.

For the first time since 1978 there were no IPOs for companies with venture capital financing, the National Venture Capital Association reported (NVCA). If the second half of 2008 matches the first half, there will only be 10 venture-backed IPOs this year, less than half the 2002 total.

About 81% of 660 financiers surveyed by NVCA said they do not see the IPO window opening until next year.

The difference between now and then is that in 2007, investment bankers could take a company that just turned profitable public. But in a bear market, investors are more skeptical, and private companies that don’t want to see stock valuations plummet as soon as they’re listed are far more timid.

Through June, 333 companies went public globally, down from 702 last year, according to Bloomberg data. The $73.2 billion those IPOs generated was a 41% decline from 2007. At least 166 companies withdrew or postponed their initial public offerings in the that time, more than double the amount in the first half of 2007. And roughly a third of those were U.S. companies.

But it’s been a different story in emerging markets where IPOs are taking in the lion’s share of the cash floating around the world’s equity markets.

Emerging Market IPOs Pick Up the Slack

Emerging markets have accounted for 70% of the value of global initial public offerings since April 1, compared with 45% over the same period last year, the Financial Times reported.

The number of emerging market IPOs dropped by 45% in the second quarter, but that compares favorably with a 65% drop in IPO issuance in the developed world.

“IPOs will continue for companies in growth sectors and markets,” Michael Lavell, co-head of capital markets at Citigroup Inc. (C) told the FT. “In many emerging markets, the economies are still expanding rapidly, as are the earnings for the companies based there. This is why the majority of IPOs this year are coming from the emerging markets.”

OGX Petroleo e Gas Participacoes SA, a Brazilian oil and gas company, was the biggest emerging market offering this year, raising $4.1 billion in its June debut. India’s Reliance Power Ltd. and China Railway Construction (PINK: CWYCF) also weathered difficult market conditions to wage successful IPOs, raising $2.6 billion and $2.4 billion respectively.

The Middle East, flush with petrodollars and a robust 8% gross domestic product (GDP) growth rate also added fuel to a fledging IPO market and looks poised to continue.

“There were 52 IPOs during 2007 and in the first half of 2008 there have been 26,” Azhar Zafar, head of mergers and acquisitions at Ernst & Young Middle East, told Gulf News. “The total capital raised in the first half of 2008 amounted to $8.69 billion compared to $4.83 billion from 33 IPOs during the same period last year,” Zafar said.

Indeed, there has been an undeniable upsurge in emerging market IPOs, but what is most amazing is that Asia, and China in particular, has been largely absent from the picture.

That’s because the credit crunch and turbulent markets in the developed world has had a negative impact on Asia, which, unlike Latin America and the Middle East, has been unable to rely on the strength of commodities for growth.

“Asian IPOs have almost reached a standstill,” Leslie Phang, the Singapore-based head of investments at private client unit of Schroders PLC, told Reuters. “Issuers are unwilling to launch at lowered valuations and investors are more focused on reducing their equity positions.”

Of course, that may be about to change.

A Possible China Turnaround

The problem is not a shortage of Chinese companies looking to go public. The problem is that the companies that do are concerned their stock won’t be fairly priced by an apprehensive market.

“The big issue is whether they will attract proceeds at the pricing levels they are looking for and it’s a bit of a disconnect right now between what people think they can get in terms of pricing and what investors are willing to pay for these companies,” Eric Landheer, head of Asia Pacific for Nasdaq OMX Group Inc. (NDAQ), told Reuters.

“We could see a flurry of [Chinese listings] in the fourth quarter should market conditions improve,” Landheer said.

Market turmoil has forced about 35 companies in the Asia Pacific region, Japan excluded, to withdraw plans to raise approximately $20 billion in offerings this year, according to Thomson Reuters data.

If market conditions improve, we could see a rush of Chinese IPOs coming off the sidelines to take advantage of a more bullish market.

“If we had just a little more stability, I think we’d be seeing more IPOs from China. But they are being challenged by some of the same issues as domestic companies. They’re afraid to go out in an environment where pricing fluctuates significantly from week to week,” says Scott Gehsmann, a global capital-markets partner at PriceWaterhouseCoopers.

Last year, a record 31 Chinese companies raised $6.8 billion through U.S. listings, but yesterday (Wednesday), China Distance Education Holdings Ltd. (ADR: DL) and China Mass Media International Advertising Corp. (ADR: CMM) became the first Chinese companies to list on a U.S. exchange since ATA Inc. (ADR: ATAI) was debuted in January.

If China Distance and China Mass Media succeed, they could instill some confidence in other wary companies, as well as restore some much needed investor confidence. Unfortunately, it will take time to gauge their success. ATA dropped 8% during its first day of trading but has since recovered and is up more than 50% from its initial price of $9.50.

By Jason Simpkins
Money Morning

Blogger’s Note: I just checked my list of upcoming IPOs for the second quarter of 2008. Would you be surprised that there is almost nothing on that list at this point? Looks like underwriters expect that the Visa IPO managed to mop up the last spills of liquidity. The only IPO that’s still being talked about is Penthouse Media Group, loosely scheduled for some time this summer. Forbes just published an article on this upcoming IPO.

Here’s what they have to say:

“But [Penthouse Media Group Chief Executive Marc] Bell is full of ideas for brand extensions of the sort that never worked too well for Playboy. He plans to sell X-rated mobile applications for cell phones that will allow users, who pay up to $10 a month, to watch videoclips of Penthouse Pets. The company has a line of 20 Penthouse-branded accessories (like a French maid’s outfit) that will be sold through the magazine, as well as Penthouse.com and a few boutiques. Visitors to Penthouse’s Web site, which is more salacious than the magazine, can pay $20 a month to watch streaming videos with titles that include Cheek Freaks 4. Bell recently signed a deal with New Frontier Media (Nasdaq: NOOF) to make Penthouse Video On Demand available on tv in 59 million homes.

“Bell plans to let Penthouse magazine, its Web outlets and other ventures market one another. Penthouse Pets make guest appearances in nine Penthouse Executive Clubs, which bring in $4 million in licensing fees a year. Ads in Penthouse magazine tout AdultFriendFinder. Members of that site will soon be able to subscribe to an online version of the magazine, which will be delivered as a pdf file, for $1 a month. All the cross-fertilization is exciting to some. “This is fabulous for business,” says Edward Norwick, restaurant manager of the Penthouse Executive Club in Manhattan, as scantily clad women gyrate on a stage nearby.”

Read the full article HERE.

J. Christoph Amberger
Today’s Financial News

The commodities supercycle has taken hoarding to a professional level. Commodities funds have been buying up gold, metals, oil, sidelining them from the market, increasing demand while reducing available supplies.

Shell games like this have become increasingly popular as panicked investors are fleeing real estate and stock markets toward the presumed safety of gold, oil and metals. The more pile in, the higher prices go. And the higher prices go, the more pile in.

If this were real estate or Internet stocks, people would call it a bubble. But since gold is involved, this is part of divine providence.

Bubble business

Back in the 1990s, budding Internet entrepreneurs still required a cocktail napkin to write their business plan on before they issued an IPO. Today, a Post-It note is sufficient.

Take the upcoming IPO of Specialty Metals Group Indium. They want to take the proceeds from their IPO, buy a stockpile of indium, sit on it for a couple of years, and hope to watch their stock price rise along with demand for indium.

They won’t even bother with actively speculating on price fluctuations.

Indium is actually a useful industrial metal that is used in the manufacture of flat panel displays, touch-screen interfaces, iPhones and solar energy.

IPO mania?

The company filed on February 27, 2008 and intends to sell 11 million shares at five bucks a pop. No IPO date has been set yet.

Sad to say that this commodities Ponzi scheme is probably going to be one of the hottest and oversubscribed IPOs coming down the pipeline this year. It will make plenty of money for the underwriter and the market maker. Hey, even in this market, two out of three ain’t bad.

Instead of chasing this stock in the aftermarket, you might take an early position in a few of the publicly traded small indium miners that could be profiting from tight supply.

One of them, Avalon Ventures, Symbol AVL, trades on the Toronto Stock Exchange. Stock prices have seen better days, but for currently C$1.28 it seems like a worthwhile speculative position on the publication of the word “indium” through the Special Metals Group Indium IPO.

Buy it between a dollar and a dollar thirty, and get ready to sell a few days after the IPO for potential gains of up to 50%.

J. Christoph Amberger
Today’s Financial News

If you managed to grab Visa (V: NYSE) at its pricing last night, congratulations. You’ve already seen a 31% gain.

But if you’re like the rest of us shlubs and had to sit on the sidelines while Visa drew in a U.S. IPO record of $17.9 billion with a pricing of $44 per share ($2 above its original range of $37 – $42), I hope you were able to buy into the stock when it fell $10 from its open price about 30 minutes after the market opened this morning.

Gleeful traders sold out of the stock early after seeing it open so high. And the long-term players came in to pick up shares and boost the stock price marginally from a low of $55 to, well, now it’s almost at $59.

Visa IPO: It’s all a matter of perspective

I’ve been watching Chinese stocks too long. And I no longer have a sense of proportion for American IPOs. If a stock doesn’t at least double in price on its first day of trading, and receive 400% oversubscription, I’m unimpressed.

The Visa IPO certainly wasn’t the glorious rout all of us were hoping for. Nothing exploded. And little to no “soaring” occurred. But I suppose pinning all of our market desires on one IPO is asking a bit much.

It was a healthy IPO. It provided a valuable new stock to the market and did manage to fulfill all of its owners’ dreams.

The banks that control Visa will walk away from the IPO with a good amount of new pocket money, including largest-shareholder JP Morgan’s $1.1 billion payout from the issue. And Visa has a new resource for liability “insurance” in the form of a $3 billion lawsuit fund socked away for the rainy days of litigation that could possibly be ahead.

But our hopes for Visa were partially pinned on the success of Mastercard’s IPO two years ago. And we have to remember that Mastercard came out of the gate stumbling. It bounced up and down through its first two months of trading before the share price took off in July 2006.

Visa IPO: Look beyond the first day

Perhaps Visa’s IPO performance is less important than the performance of shares over the coming year. If it’s anything like Mastercard, you have until about mid-May to buy shares before the boom starts (of course, that’s also the beginning of the summer doldrums… ).

And Visa is still a solid company to own through the current American market melee. If Congress gets its way, the company may have to give up some of its U.S. profits. But that would be why the company is concentrating so hard on pushing into foreign markets these days.

Visa operates networks in 231 countries. And it recently reorganized to bring all of its foreign affiliates (excluding Visa Europe, which has the snooty, picky EU to deal with and is now a licensee to its parent company) under the umbrella of Visa Inc.

Possibly, Visa saw a future government clampdown before the rest of us noticed it and decided to refashion itself in preparation. Or maybe it just wanted to streamline its inner workings before it went public.

Either way, the change will prove to be a brilliant one if the legislation does go through. Visa will be able to concentrate on building up its foreign networks and pull in profits, while Mastercard and other credit card companies (both the card issuers and the credit issuers) flounder for new revenue sources.

Visa IPO: The best is yet to come

And don’t forget that, no matter how far the banks fall in the current crisis, Visa won’t feel it. Some of the company’s owners may have to sell their shares (or themselves), but that shouldn’t affect Visa’s services or its profit sources.

Banks won’t be signing out of their Visa service agreements (can you really imagine a bank not offering a check or credit card these days, even if it is circling the drain?). And while people in the U.S. may be more careful about how and what they spend, Visa’s foreign customers, especially those in India, China and Brazil, will be discovering credit and the idea of plastic money for the first time.

Visa is a good investment, despite sliding down to close at $56.50 this afternoon. Even if you didn’t get into the IPO, the stock is going to thrive in an industry that’s taking a nosedive. Money from other credit card companies will pile into Visa, and the market will build up the stock as it tears down Visa’s competitors.

Stephanie Grimmett
Today’s Financial News