Losses to the right of them
Losses to the left of them
Losses in front of them...
IPO investors over the last year must feel a lot like the horsemen of the Light Brigade as they rode into the Valley of Death. Buying initial public offerings since the middle of 2021 has been the financial equivalent of riding into the cannons with just a saber.
Over the past 112 months, according to IPOScoop.com, there have been 292 IPOs completed.
Only 30 of them have made their investors any money.
Some of these stocks have been beaten up very severely, and for good reason. They were unprofitable companies bought to market at ridiculous valuations. They told a good story but never had a chance to succeed.
However, there have been some real companies with solid businesses that got caught up in the carnage - innocent bystanders, if you would - which would have had reasonable stock prices in normal times.
With markets taking a beating all across the board, these IPO "busted deal" stocks can be real diamonds in the rough. They often recover and move back to the IPO price and even higher over time, and I've frequently made a tidy profit scouring the IPO aftermarket for these.
One of the most reliable signs that a post-IPO stock is on the road to recovery is when corporate insiders buy large amounts of stocks.
You see, insiders sell stocks for all kinds of reasons - loss harvesting, bankrolling big-ticket purchases, you name it. But they buy for one reason and one reason alone: They're expecting the stock to move much, much higher.
I've got two companies on my radar that check off every box on my list - busted IPO, strong business model, sudden wave of insider buying. I think both are on track to give investors triple-digit returns, and they're dirt cheap right now.
Here are the tickers...
This Modern Camping Gear Company Is a Sleeper Hit
Solo Brands Inc. (NYSE: DTC) is an online retailer of outdoor lifestyle branded products. Its flagship product is the Solo Stove, a portable smokeless fire pit for camping. It's since expanded to sell the Oru kayak and Isle paddleboard brands, and the Chubbies line of swim trunks, casual shorts, polos, shirts, and loungewear.
Business is pretty good as they reported revenue growth of 19% year over year in the first quarter. Management guidance is for full-year revenue of between $540 and $570 million, a 34% to 41% improvement over 2021.
Despite that, the stock has taken a serious hit since its IPO in late October 2021, from a debut at $18.36 down to around $4 as of this writing.
But it looks like there could be upside movement coming soon, given the insider activity we're seeing. Both the CEO and CFO at Solo Brands have recently made six-figure DTC purchases in the open market, following another round of buying they did back in November at much higher prices.
Solo's average earnings estimate is well over $1, giving them a forward price/earnings ratio of less than 5 right now. The average price target is almost $14, with the stock trading at just about $4.
Given that they beat their Q1 EPS estimates by more than 133%, and given the strong pattern of insider buying, I could easily see DTC climb back up to that target.
Leading the Pack in Home Healthcare
Aveanna Healthcare Holdings Inc. (NASDAQ: AVAH) is a home healthcare company that's managing to succeed in an exceedingly tough business, thanks to the pandemic. It's had challenges finding staff, thanks to the differing pay rates between Medicaid private duty nursing and regular vocational nursing.
Hospitals and traveling nursing companies use this rate gap to target and steal Aveanna's employees, making business even more difficult.
Despite these challenges, Aveanna has been able to drive revenue growth of about 10% a year since 2018, and its net income was up more than 300% year over year as of last quarter.
Still, since its April 2021 IPO, the stock has taken a real beating and is down more than 75% over the past year.
But the long-term outlook for the home healthcare industry is excellent. Every day in the United States, 10,000 people turn 65. We are growing older as a nation, and that will not stop anytime soon.
Aveanna Healthcare has a robust pediatric home care business. That segment will see growing demand as clinical advancements allow kids with certain conditions to live longer and be cared for outside the hospital environment.
There are nine analysts following Aveanna Healthcare, and eight of them have the stock rated as a buy or strong buy. In addition, with the stock trading at about $3, the average price target is $6. This means that some of the biggest firms on Wall Street are expecting triple-digit returns from shares of Aveanna Healthcare.
I think Wall Street is too low. In my opinion, the revenue and cash flow levels that CEO Tony Strange talked about on the most recent conference call should justify a stock price closer to $10.
It's also clear that insiders are expecting big things. Seven executives have bought stock worth over $600,000 as the price has fallen.
Remember, corporate insiders do not invest for percentages. They only buy when they expect to make multiples of the cash they invest. It's a good idea to follow their lead.
It's more important than ever for investors to find ways not only to preserve existing capital but position themselves for the best gains when markets recover. Because they also can benefit from higher interest rates, banks are one area where investors are taking refuge.
But there are two additional key market sectors where a new flood of buying is going to create opportunities for potentially massive profits, especially in small-cap stocks that often get overlooked by the major players.
Money Morning Chief Investment Strategist Shah Gilani has a strategy to narrow thousands of these stocks down to the few with the biggest potential to be the next market winners.
About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.