3 IPOs That Could Be Tomorrow's Superstars

David Sterman's picture

Friday, July 26, 2013 - 2:30pm

by David Sterman

Did you miss out on the recent hot IPOs for Noodles & Co. (Nasdaq: NDLS), Fairway Group Holdings (NYSE: FWM) and Stemline Therapeutics (Nasdaq: STML)?

Well, the hits keep on coming. Phillips 66 Partners (Nasdaq: PSXP), which was one of the looming initial public offerings that I profiled last week, surged a hefty 30% in its first day of trading.

If you missed out on these fast starters, fret not. Many other recent IPOs haven't fared nearly as well from their initial IPO price as these big gainers. IPOs sometimes need to simmer for a bit as investors only belatedly get around to checking them out. 

Here's a quick look at what the hot money may have initially missed but far-sighted investors may soon start snapping up.

1. Esperion Therapeutics (Nasdaq: ESPR)
Thanks to the blockbuster success of Lipitor and other statins, the cholesterol-fighting market has always been seen as a great prize for drug companies. Billions in sales await any drug that can get through the FDA approval process and surpass the efficacy and/or safety of existing drugs. Trouble is, a handful of cholesterol drugs have petered out in clinical trials in the past few years as their backers realized that the drugs had little chance for FDA approval.

Esperion's prospects look a bit brighter. The company has undergone multiple Phase II trials for ETC-1002, which has thus far shown that the drug has lowered low-density lipid (LDL) levels to below those of existing statins. "The safety and tolerability profile seen to date is favorable and may enable differentiation from current standards of care," noted analysts at JMP Securities, who carry a $25 price target on the stock. Esperion priced its IPO at $14 a share in late June and shares are trading for around $17.

Citigroup (NYSE: C) has an even higher $30 target price, figuring the drug may eventually serve a population of more than 10 million Americans and an $8 billion to $10 billion global opportunity. Before you get too excited, note that many drugs perform very well in Phase II trials but stumble in Phase III trials when testing populations sharply expand. Still, any new cholesterol drug that can stand up through Phase III trials will indeed get a huge deal of buzz. Such an event is likely more than a year away.


2. Nanostring Technologies (Nasdaq: NSTG)
Seattle-based Nanostring proved to be a tough sell for its investment bankers: An IPO that was expected to be priced in the $13 to $15 range ended up launching at $10 due to weak demand, and remains below $10 today.

Yet unlike some development-stage medical companies that go public without approved products on the market, Nanostring, which sells diagnostic equipment to detect cancer cells, already had $24 million sales in the prior 12 months. Analysts at Leerink Swan see that figure rising to $52 million by next year.

To be sure, these are expensive machines, requiring extensive sales efforts. Yet Leerink Swan believes that Nanostring, which sold 127 million units in 2012, will sell more than 350 million units by 2015. That kind of projected growth underpins its $15 price target, which is more than 60% above current levels. 


3. Gogo (Nasdaq: GOGO)
In-flight Wi-Fi is shaping up to be a solid new revenue opportunity for many global airlines, and you can now find the service on many transcontinental flights. The fact that less than 15% of airline passengers have chosen to pay the $10 or $15 fee on any given flight may be seen as a possible disappointment, and may explain why this IPO has fallen roughly 25% from its late June $17 offering price.

Gogo installs and maintains the communications equipment that airplanes need to deliver Wi-Fi, and the company has lined up a blue-chip list of clients including Delta (NYSE: DAL), United Continental (NYSE: UAL) and Virgin. In fact, the company controls more than three-fourths of the nascent domestic sky-high Wi-Fi market. And analysts at UBS add that "This dominance positions it to win share among international carriers, a market roughly two times the size of the U.S." GoGo also provides gear to more than a third of all business jets flying across the U.S.

To be sure, the company will see greater competition in the next half-decade as existing contracts with the domestic carriers come up for rebid. That could lead to price pressures, especially if the airlines want to inspire greater adoption of the in-flight Wi-Fi service.

Those UBS analysts see considerable revenue growth and cash flow generation in the years to come for Gogo, despite the competitive concerns, and using their 2015 financial metrics as a basis, have a $20 price target in place, which is more than 50% above current levels.

Risks to Consider: IPOs can perform quite well in a rising stock market but are especially vulnerable to sharp drops in a weak stock market, due to their lack of proven track records and established base of shareholders. Still, these stocks' underwhelming debuts implies a lot less risk than owning some of this summer's more scorching IPOs. 

Action to Take --> The fact that IPOs like these have not raced out of the gate might highlight some red flags, so extensive research is necessary. It may be in your interest to await their upcoming quarterly releases, at which time they will hold their first deep conversations with the public.

P.S. -- Investors scored a 30% gain with Phillips 66 Partners in its first day of trading. This company is part of a special group of stocks that have a wealthy and powerful company backing them -- or what we like to call a "Rich Parent." These "Rich Parent" stocks are one of my favorite ways to profit in the market right now. To get the names of some of these unique stocks today, click here.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.