To get a glimpse of the future of the stock market, try to make dinner reservations, play an online game in Chinese, learn a new language or hunt for detailed local photos from space.
Companies providing these services are at the forefront of a growth spurt in global business, showing that innovation has continued to surge in these difficult times for entrepreneurs able to elude the tightening of bank credit and crushing of consumer spending.
If you can't borrow money to build a better mousetrap, you have to build a mousetrap that is so awesome that even penny-pinching customers will flood you with the cash flow required to expand. And now that equity and credit markets have loosened up a bit, these are the companies reaping the rewards of their persistence by being at the front of the line to sell shares to the public.
The most celebrated of the small new crop of initial public offerings this year has been OpenTable (OPEN, news, msgs), a young San Francisco company that earns fees from restaurants that use its online network to take dining reservations and sell related services to more than 3 million customers a month. It's a clever idea and a surprisingly profitable business plan.
After a big-buzz opening week, OPEN's shareholder tables are full, along with its valuation. But there are six other profitable outfits with lower profiles that have managed to go public this year, and all but one of the stocks are quietly rockin' the house. In a five-month span that has seen the S&P 500 Index ($INX) eke out a 2% gain, an index that tracks the post-issuance returns of IPOs has risen 22% with relatively minimal volatility.
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With investors' appetite for risk increasing and the quality of IPOs rising, this asset class is bound to get a lot more attention this year. It's virtually certain that Skype, a popular Internet phone service, will be spun off as an IPO by parent eBay (EBAY, news, msgs) in the third quarter, and it's rumored that IPOs for social-networking site Facebook and restaurant chain Dunkin' Donuts won't be far behind.- Top Stocks blog: Is IPO window big enough for Facebook?
The buzz surrounding these will lead even more investors to dip their toes into waters they abandoned after the Internet stock debacle of the late 1990s. So if you're intrepid, you can beat the crowd and get started early.
This is actually much less risky than it may sound. Kathleen Smith, the principal at Renaissance Capital in Greenwich, Conn., says IPOs are the lone equity class that has shown a positive return over the past five years as more-established, slower-growing companies have foundered. "Sedate markets are the best for IPOs," Smith says, observing that the stifling decade of the 1970s, which was agonizing for most market sectors, was one of the best for new issues.
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An investment window opening?Prospects for fundraising are looking up on the heels of OpenTable's IPO and Digital Sky's $200 million investment in Facebook.
She recommends buying in the IPOs that are the least celebrated in the periods in which only the best companies can come public. Like now. Here are some ideas to kick around:
- The only company to go public in the harrowing first three months of the year was infant-formula maker Mead Johnson Nutrition (MJN, news, msgs), a $6 billion company that was spun out of Bristol-Myers Squibb (BMY, news, msgs). This is one of those rock-solid brand-name businesses that investors consider to be defensive, which means it has reliable cash flows from a steady stream of customers who are mostly immune to the economy's ups and downs. It went public at $24 a share in February, jumped to $27 the next day, and, after yawing sideways for the next two months, it has shot out to new highs in the low $30s. It's not expensive and can be bought when the stock price shows weakness.
- DigitalGlobe (DGI, news, msgs), which operates two imagery satellites and provides high-resolution photos to businesses and governments, is the only one of the new batch of IPOs that has fallen below its initial price. A similar company ran into trouble with its satellite software, and the bad vibes scared people away from DGI. But this is a seasoned company coming into the sweet spot of the economic cycle, as it has a specialty in providing imagery to oil and gas explorers and environmental monitors.
- My favorite of the new crop, though, is ChangYou.com (CYOU, news, msgs), and not just for its clever trading symbol. This was previously the online gaming division of popular Chinese Internet service provider Sohu.com (SOHU, news, msgs) and has become extremely popular in its native country for providing teens and young adults with a multiplayer martial-arts fantasy game called Tian Long Ba Bu. Hundreds of thousands of people have adopted characters within this virtual world and can interact with each other.
Continued: Profiting from escapism
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