The IPO Buzz: Room at the IPO Inn

The industrial sector and its index, the Dow Jones U.S. Hotel & Lodging REITs Index (DJUSHL), have been off and running over the last 52 weeks. The Index closed on Friday, April 9, 2010, at 90.62 — UP 18.3 percent from 74.06, its close on Dec. 31, 2009 — and UP 132.6 percent from 38.96, its close a year ago on April 10, 2009.

In comparison, the Nasdaq Composite Index closed on Friday at 2,454.05, UP 8.15 percent for the year, and UP 48.5 percent from 1,652.54, its close on April 9, 2009.

There’s a reason for the Hotel & Lodging REITs Index’s strength: It’s a dividend play for investors seeking income, according to Wall Street professionals. To qualify as a REIT or real estate investment trust, a company must distribute 90 percent of its taxable income to its shareholders.

Plush Life

This week’s only deal is a recently formed hotel and lodging REIT.

Chatham Lodging Trust (CLDT – proposed) is a Palm Beach, Florida-based hotel investment company formed in October 2009 to invest in premium-branded upscale extended-stay lodging such as Residence Inn by Marriott or Homewood Suites by Hilton, as well as upscale select-service hotels and full-service hotels.

Chatham has no operating history and does not own any hotel properties. The company has entered into an agreement to buy six “initial acquisition” hotels following the closing of this offering, but there is no assurance that it will complete such a purchase.

The company plans to offer 7.5 million shares at $20 each to raise $150 million. The deal is expected to be priced on Thursday evening, April 15, which incidentally is the tax-filing deadline day, to trade on Friday morning, April 16.

A Few Reservations

Taking note of the opening-day results for REITs from 2008 to the present, bankers have priced 14 deals, according to the U.S. Securities and Exchange Commission filings.

Only four of the 14 REITS closed their opening days as winners. Nine were losers. One was unchanged.

The average loss for the 14 was 1.68 percent.

This is the reason the IPO handicappers are not looking for an opening-day moonshot.

Disclosure: Neither the author nor anyone else on the IPOScoop.com staff has a position in any stocks mentioned, nor do they trade or invest in IPOs. The author and IPOScoop.com staff do not issue advice, recommendations or opinions.

Hyatt Hotels (NYSE: H – proposed) plans to price 38 million shares at $23 to $26 each to raise $931 million. All the stock is being offered by the Pritzker family, which will still own about 77 percent of Hyatt after the offering.

There has been some media coverage of controversy about the family. How it will affect the offering remains to be seen. The deal is scheduled to be priced Thursday evening for trading on Friday.

Ancestry.com (NASDAQ: ACOM – proposed) plans to price 7.4 million shares at $12.50 to $14.50 each to raise $100 million. The company will offer 4.07 million shares; selling shareholders will offer 3.33 million shares.

Had the company gone public when it was formed in 1998, the IPO would have skyrocketed for an opening-day gain of 100 to 200 percent or more. A decade later, it is a different story. Ancestry.com has steady revenue growth and is profitable. The deal is to be priced Wednesday evening for trading on Thursday.

Sorting IPO Winners and Losers

But there’s trouble in IPO Paradise.

A quick glance at the 2009 IPO Scorecard tells you there is no barroom bragging in the watering holes of Wall Street.

Nineteen of the year’s 44 IPOs closed above their initial offering prices on Friday Oct. 30. Collectively, their average gain was 9.4 percent.

The three major U.S. stock market indexes have done much better.

At Friday’s close, the Dow Jones Industrial Average was up 10.7 percent for the year, the Nasdaq Composite was up 29.7 percent and the S&P 500 was up 14.7 percent.

Nevertheless there have been several solid winners among this year’s IPO crop. They were:

Duoyuan Global Water (NYSE: DGW) closed on Friday at $32.78, UP 104.9 percent from $16, its initial offering price.
Changyou.com (NASDAQ: CYOU) closed on Friday at $30.13, UP 88.3 percent from $16, its initial offering price.
Mead Johnson Nutrition (NYSE: MJN) closed on Friday at $42.04, UP 75.2 percent from $24, its initial offering price.

Duoyuan Global Water and Mead Johnson were both priced above their filing ranges. This is a clue to sorting winners and losers. Let’s take a closer look.

Clues

Follow the industry sectors, and then compare a deal’s pricing terms to its original filing terms.

Industry Sector

The industry sectors will tell you where the action is. This year, it has been in technology. Tech IPOs have accounted for 15 of the year’s 44 IPOs, according to the U.S. Securities and Exchange Commission’s filings. Collectively, their aftermarket performance produced an average gain of 17.4 percent — nearly double the 9.4 percent gain by all 2009 IPOs.

Technology is an industry sector to bookmark.

(See IPOScoop home page for “Pricing” then click on “By Industry.”)

The second-busiest industry sector also gave a clue. It was finance. The financial IPOs have accounted for 10 of this year’s deals, and REITs for eight of them. That has not been such a hot performer. Three REITS, or real estate investment trusts, closed above issue price on Oct. 30. The average aftermarket performance of the financial sector’s 10 IPOs turned out to be an average aftermarket LOSS of 1.8 percent.

Finance is not an industry sector to bookmark.

Final Pricing Terms

This clue tends to be accurate. Compare an IPO’s pricing terms to its original filing and then rate it according to these parameters: priced below its filing range; priced within filing range, or priced above range. Consider the following:

Below range -– Forget it. There have been 13 IPOs priced below range this year, and only one –- yes, just one -– was a winner by Oct. 30’s close. Collectively, their average aftermarket performance was a loss of 6.97 percent.
Within range -– Nothing to get excited about. There were 12 IPOs priced within range, and four were winners. Collectively, their average aftermarket performance was a gain of 3.9 percent.
Above range –- Yes! There were 19 IPOs priced above range, and 15 were in the winner’s circle. Their average aftermarket gain was 22.2 percent.

These guidelines are not hard-and-fast rules. Remember, there are always exceptions to every rule.

Take Your Vitamins

Nevertheless, let’s take a look at last week’s traffic and apply these guidelines.

Vitamin Shoppe (NYSE: VSI), a retail vitamin store, started trading at $19.50 per share, UP from its $17 offering price. The deal was priced above its original filing range of $14 to $16 per share.

Note: This was the first retailer to go public this year, but there’s another in the works – rue21 (NYSE: RUE – proposed).

Addus HomeCare (NASDAQ: ADUS), a provider of health care facilities, started trading at $9.40 per share, DOWN from its $10 offering price. The deal was priced below its original filing range of $11 to $13 per share.

The healthcare sector has been a laggard. Including Addus, three healthcare providers have gone public this year. Each was priced below range and, on Oct. 30, all three were losers. Their collective average loss was 6.6 percent.

Moral of this story: Keep an eye on industry sectors as well as on IPO filings and pricings for clues on what to expect from this week’s IPO calendar.