Rare IPO by Chinese game maker may herald big gains
In one sense, Changyou.com is truly exceptional. After all, it's one of only three successful IPOs in the U.S. market since last fall, when the collapse of Lehman Bros. and all that followed plunged stock markets and the economy into turmoil. But thanks to its stock's big early gains, Changyou.com also has a chance to share something with the handful of other companies to go public recently: They're all out-performing the market in a big way.
It's much too early to say what the future holds for Changyou's stock. But consider how the two companies to precede it in going public have fared:
Online university operator Grand Canyon Education (LOPE) had to slash the price of its shares a couple of times before ultimately raising $126 million in its debut offering last November. It now trades at $16.68 a share, a gain of about 39 percent from its IPO price of $12, compared with a 22 percent gain for Nasdaq.
And Mead Johnson Nutrition (MJN), a baby-food maker, sold 30 million shares at $24 a piece to raise $720 million in its February IPO, according to Renaissance Capital's IPOHome.com. Since then, it has gained another 16 percent to trade above $27. Meanwhile, the S&P 500 was virtually flat over the same period.
It has been two decades since a year started this dismally for IPOs, according to statistics from Thomson Reuters. But it's neither a surprise nor an accident that shares of Changyou.com, Grand Canyon Education and Mead Johnson Nutrition have done so well.
Investors in IPOs are only interested in companies with solid business prospects, according to IPOHome.com analysts. (Both online education and baby food are recession-resistant, and Changyou is plugged into a booming Chinese market.) And even when they find them, they're pushing for bargains, driving down their initial share prices. Those pressures combine to produce spring-loaded stocks.
"History has shown that slow IPO periods can lead to strong returns, thanks to higher-quality companies being priced at more attractive valuations," the analysts wrote.
These aren't the high-flying tech start-ups that captured the public imagination and dominated the IPO market a decade ago. But they are solid companies. Changyou.com offers an alluring combination of "strong revenue growth, extremely high margins and a recurring revenue model," according to an IPOHome.com report.
If others can follow in its example, they may find that surviving the brutal IPO market is just the beginning of their good fortune.