Earlier this week, battery maker A123 Systems (NASDAQ: AONE) commenced public trading of its shares, raising more than $340 million in the largest IPO of 2009. Those who got into the stock early have been rewarded handsomely – shares are up nearly 70% right now. But AONE is only the latest in a string of initial public offerings that capped off the biggest week in IPOs since 2007.

To be fair, that hasn’t been a difficult benchmark to beat. Since the fallout from the credit crunch began, the IPO market has deteriorated to the point where only a single U.S. company went public in both the last quarter of 2008 and the first quarter of 2009. Things heated up again last quarter with 13 public offerings, but those numbers still paled in comparison to the 95 stocks that traded for the first time in the last quarter of 2007. Now, with murmurings of the recession’s end upon us, the bullish signals from an IPO resurgence shouldn’t be ignored.

Not everyone agrees with that prognosis…

“The fact that the many in the media are classifying three IPOs as a resurgence is evidence of how low our expectations have become,” National Venture Capital Association President Mark Heesen said in a statement picked up by Reuters.

“[This] not the direction we hoped to see. While the psychology of the market is trending positive, our original forecast of a true recovery not beginning until 2010 still unfortunately holds true,” he continued.

And while Heesen’s concerns about the IPO market’s recovery have been echoed throughout Wall Street this week, it’s inaccurate to say that a recovery in public offerings isn’t happening right before us. At the start of this week there had been 11 new public offerings in the third quarter of 2009. That’s a huge departure from the nearly post-mortem IPO market that we were in the midst of six months ago.

IPO bears lost more credibility on Wednesday when Talecris Biotherapeutics (NASDAQ: TLCR) went public, breaking the year’s domestic IPO record for the second time this week. The biopharma stock raised $950 million in its offering, the biggest IPO for the sector since 2006. The Talecris offering comes after China State Construction Engineering Corp’s record-breaking $7.34 billion IPO on the Shanghai Stock Exchange, and a week ahead of Banco Santander’s public offering next week, which at $7.25 billion will once again bust the year’s record for the biggest American-traded IPO.

What were the “experts” saying about a dead IPO market until 2010?

And with some exciting companies filing to go public in the coming months – including NewEgg.com and Dollar General – things aren’t slowing down yet. To be clear, a strong IPO market doesn’t necessarily say much about stocks in general. The S&P 500 has already slumped 2% this week despite all of the offering activity that’s happening before us. It does bode well for small-cap stocks, however…

There’s a big argument going on right now among the vast majority of investors: some are claiming that the market is perfectly primed for a 10 year bull rally, while others are bracing for the next market correction. But in the small-cap world, things move very differently. Every single U.S. IPO this year has been a small-cap stock, which tells me that the investment banking syndicates – which have some of the most advanced market data available – are bullish on small-caps.

Why does IPO activity suggest where the big investment banks are putting their money? Studies by Nobel Prize winning economists Franco Modigliani and Merton Miller showed that, historically, investment banking syndicates and venture capital firms will not push companies to go public in a down market. That phenomenon actually makes a lot of sense, because in a bear market, investors are willing to contribute far less money to a stock’s underwriting premium – the “commission” that an investment bank gets by selling an IPO’s shares for more than they paid.

By unleashing primarily small-cap IPOs so far this year, evidence points to growth opportunities in the small-cap space.

So, how do you make a play off the potential of penny stocks? Look for small-cap plays that remain deeply undervalued to capitalize on the buying that’s going on right now. That’s a more difficult prescription than it was six months ago before the market rally, but ignored penny stocks still remain one of the last vestiges of value right now.

It’s also important to keep in mind that sentiment is prone to change. While small-caps might be a favored market space right now, a huge drop in the rest of the market will undoubtedly take penny stocks with it. We’ll continue to watch broad moves with our Small-Cap Recovery Index for that very reason.

There’s little question that IPOs are having a fantastic quarter, one that will break records for the year once all of the numbers are crunched. And as long as the industry’s experts continue to be disappointed in the wake of unrealistic expectations, most investors will miss the growth sentiment in small-caps. That makes right now a perfect time to position your portfolio.

Cheers,
Jonas Elmerraji

October 2, 2009

Why the Latest Trend in IPOs Is Great for Penny Stock Investors was originally featured in the Penny Sleuth.

Currently, most applications simply integrate superior nanotech materials into existing products. Carbon allotropes are used to produce gecko tape. Antibacterial nano-silver is used in clothing, food packaging, disinfectants and household appliances. Nano-sized cerium oxide is employed as a fuel catalyst. Increasingly sophisticated products are appearing at the rate of two-four per week.

This month, we’re going to invest in 33 nanotech companies. Almost all are pre-IPO privately held startups. And we’ll do it in one step while retaining complete liquidity.

In the process, I’ll describe how one company is altering the DNA of viruses to attack cancers. I’ll also talk about a company that gets oils from algae. Another company that we’ll be adding to our portfolio is the leading contender in the race to make your current computer as obsolete as an abacus.

It’s Time to Get into the VC Business

One of the greatest frustrations about this job is coming across fantastic startups that I can’t add to the portfolio. I’ve written at length about a few of these pre-IPO companies with enormous, nearly inevitable returns. There are many more, in fact, that I haven’t mentioned. As a result, I truly envy venture capitalists. For some time, I’ve been fantasizing about a breakthrough technology venture capital fund. This isn’t quite that, but it’s close.

The attractions of the VC (venture capital) business are obvious. One is simply the ability to go where equity investors cannot. It irks me that VCs get to buy into obviously transformational companies when we can’t. The other reason is the rate of return enjoyed by VCs is typically so much higher than the stock market’s. I really want you to get in on the high yields earned by angel and venture capitalists.

This is why I’m so pleased to have come across our newest addition to the Breakthrough Technology Alert portfolio. Buying stock in this company allows you to participate in some of the most exciting and promising nanotech startups in existence – on better than VC terms.

This company acts as a kind of VC mutual fund, investing only in privately held early-stage breakthrough technologies. Moreover, your participation in the VC market remains liquid because you can sell the fund at any time. That’s a privilege that normal venture capitalists don’t have.

Not only does the VC fund take positions in important startups, it is actively engaged, bringing its expertise to and working side by side with the management of its portfolio companies. With its broad knowledge of the nanotech industry, the fund can help portfolio companies with general strategic and operational problems, as well as business and intellectual property strategy. It helps with executive recruiting, fundraising and compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

Perhaps most importantly, it is in the position to build collaborations with strategic partners.

In the process of vetting this company, I spoke at length with the company’s CEO. I was pleased, by the way, to hear he had enjoyed reading some of our past issues of Breakthrough Technology Alert.

He took the time to explain the VC fund’s investment philosophy to my associate Ray Blanco and me. According to this CEO, the current team has grown from four to 11 members since 2002. Five have extensive VC experiences. Additionally, team members have expertise in solid-state physicists, biochemistry and other technologies that intersect and converge with nanotechnology.

This team constantly monitors the world of nanotech. Additionally, it maintains contact with nanotech scientists in academia, where much cutting-edge research is taking place. While academic research is typically too early a stage for investors, these relationships allow the fund to identify important spinoffs as they occur.

We know that the long-term promise of nanotech is world changing. The immediate challenge for nanotech investors is finding companies in the commercialization stage. As I’ve explained, we at Breakthrough Technology Alert don’t mind getting in a little early, because the eventual returns will be so high. Investors do, however, want to know that their portfolios will maintain and increase in value while waiting for those eventual huge returns. Everyone at this unique venture capital fund clearly understands this need for liquidity.

The Only Publicly Traded Liquid Nanotech VC Firm

To my knowledge, this investment is the only truly liquid nanotech venture capital company available to stock buyers. Diversification is at the heart of its investment philosophy. It generally doesn’t put more than 5% of its gross assets in any single holding.

It also maintains large cash reserves as a means of counterbalancing the inherent risk of investing in young nanotech businesses that are not yet profitable. As its CEO says, the fund offers a “diversified way to play the emergence of nanotechnology – when most of the companies are still private – in a public vehicle.”

Several of its holdings are, however, already earning significant revenues. Companies in the portfolio generated $242 million in revenue for 2008, a 22% increase over 2007. Other companies are on track to becoming revenue producers or to significantly increase revenues.

Since I recommended this unique venture capital fund to my readers last week, we’re already closing in on double-digit gains. If you want access to my full report on this stock – as well as new transformational technology stocks each month – visit the Breakthrough Technology Alert website.

Sincerely,
Patrick Cox

July 2, 2009

Earn Venture Capital Profits for Your Stock Portfolio was originally featured in the Penny Sleuth.