Some of the most dramatic gains in market history have come from initial public offerings (IPOs). When Google (Nasdaq: GOOG) went public in 2004, it was already a major player in Internet search, though not the dominant power it is today. The company was still in the early stages of a major growth spurt. Google's search algorithms allowed advertisers to target their messages in a way never before possible. Even better, advertisers could see how effective their ads were in generating clicks and sales.
The result: From the close on Google's first full day of trading through the end of 2009, the stock soared +518%, compared to a +15% gain for the S&P 500. It's the classic example of a successful IPO: a relatively young company that has only just begun to probe its potential market.Not all successful IPOs are young firms. Visa (NYSE: V) had been around as a privately held company for decades prior to its March 2008 IPO. But demand for the shares was high thanks to the success of competitor MasterCard's (NYSE: MA) IPO in 2006. And as we mention below, consumers the world over are increasingly turning to electronic payment via credit and debit cards rather than cash and checks.
Despite the fact Visa went public amid the worst global recession in decades, the stock returned +56% from the close on the first day of trading through the end of 2009.
When a company undertakes an IPO, it's essentially selling itself to the public in hopes of generating significant capital. Oftentimes, new IPOs are relatively young companies that are looking to fund expansion efforts or older firms looking to ramp up sales in new markets. Over the course of history, studies have shown that public companies tend to see their most dramatic revenue and earnings growth within five years of their IPO.
The IPO market is cyclical. When the stock market is rising, investors' appetite for young, fast-growing companies is high. The opposite is usually true during and immediately following bear markets.
With these points in mind, I scoured the market looking for solidly profitable, growing firms that have gone public over the past year. I looked for stocks fitting the following criteria:
- Companies listed on the major US exchanges
- Price greater than $10 per share
- Market capitalization greater than $200 million
- Complete an IPO on or after January 2, 2009
- Current operating margins greater than +30%
Here are the results of this screen:
Now, the odds of any of these being the next Google are slim. However, this list should give you a great starting point for picking IPOs that could reap large rewards.
