IPOmania Two!!

Remember back in the heyday (if there ever actually was one) of professional wrestling…or “wrasslin’ “ as we say down south…there was some huge event billed as “Wrestlemania”? I really was never into wrestling but I seem to remember it was some sort of all star, good guys versus bad guys, pay per view, cage match, knock down drag out type of event. “Wrestlemania” was followed by “Wrestlemania 2”. Didn’t see that one, either but I’m pretty sure it was the same crappy event as the first “Wrestlemania”. Something similar is currently going on in the capital markets. It happened over a decade ago and was called “Stupid Internet IPO mania”. The sequel is happening now and it’s just as dumb as before.

At the end of the 20th century, there was no shortage of bonehead stupid, internet IPO’s. No earnings. No revenue models. Very vague concepts. No surprise that things ended badly. The internet has grown up considerably since then and many internet oriented companies have figured out how to actually make money. However, the recent crop of offerings feels very retro. The maniacal pricing in the secondary market is back with a Ric Flair style vengence. Professional social networker, Linked In (LNKD) was instantly rewarded with a ridiculous valuation. Pandora (P) had a lot of money thrown at it for a hot, oversubscribed IPO despite analyst doubts about the company’s ability to make money. After all of the hype, the price fizzled quickly.

Money can be made on a big scale on the internet by public companies. Ebay (although it’s probably seen it’s day), Google and Amazon seemed to have done pretty well. I’m sure there’re others. However, a lot of these newer companies strike me as businesses that would be more successful if they remained private. With a publicly traded structure comes much more accountability as you’re dealing with lots of other people’s money. Individuals, institutions and research scrutiny change the way these loosey-goosey outfits work.

I can understand how Pandora could eventually make money. I’m a user of the free version and a big fan. It’s the poor man’s XM. The ads aren’t too intrusive yet and even if they got to the point at which they were, most people still wouldn’t mind. Plus, there’s probably some kind of per subscriber deal between Pandora and the wireless provider much like in the cable television industry.

But for the life of me, I can’t figure out how Linkedin or even the mighty Facebook can or will do it. I’m sure they will. Just don’t see it in the here and now and with a bazillion dollars raised publicly, that doesn’t really fly.

These companies are much better suited to be private entities. There’s no shortage of private capital willing to throw money at ideas like these and a lot of times private money is much more patient. It makes more sense. These businesses can stay private and then eventually, maybe a larger, traditional media company will waste it’s money. See: News Corp and Myspace.

But, just like pro wrestling, the internet IPO mania will continue. As long as there are enough idiots to look at it, they’ll keep doing it.

Well…let’s try to wrassle this week’s three lil’ piggies…

“Everyone can agree…”

Agree Realty (ADC)
Recent Price: 22.65
P/E: 21.37
Current Yield: 7.06%

The Skinny
Is it time to tip toe back into CRE (commercial real estate)? Based on somewhat improved consumer sentiment, maybe so. ADC is a smallish ($209 million market cap) retail commercial REIT based in Farmington Hills, MI. The company owns 73 properties across 16 states and deals primarily with national and regional retail companies. In total, ADC manages about 3.5 million square feet of leasable space. Fundamentals aren’t too bad. Revenue has come in at about $35 million a year on average over the last few years. 2009 was actually up 4.5% over 2008 in the deepest part of the recession. Shares trade at just 1.31 times book and are 22% off of their 52 week high. The Agree family still runs the company which can be a good thing especially if they don’t control the majority of the stock. They don’t. ADC looks like an interesting idea and isn’t horribly over priced.

The Danger
In retail focused CRE, the biggest risk you run is business failure and, over the last few years, there have been quite a few. A current retail disaster is the bankruptcy of book retailer Borders. Borders is (was) ADC’s second largest tenant and represented 20% of their annual base rent. That’s gonna leave a mark. On a broader level, while retail spirits may be nudging up a bit, the ship is hardly clear of the rocks. The recent spate of downbeat economic news has put the kibosh on the party. That won’t help retail rents going forward. Proceed with caution.

“Thick as a steel BRIC…”

Companiha Siderurgica Nacional ADR (SID)
Recent Price: 11.97
P/E: 9.1
Current Yield: 6.39%

The Skinny
Many of the talking heads continue to pound the table: “Buy the BRIC countries!!” The BRIC countries for those who have been in a coma are Brazil, Russia, India, and China. I wouldn’t buy Russia or China with my soon to be ex-brother in law’s money. Brazil and India are doable. And what better way to buy emerging growth than through steel. Headquartered in Sao Paulo, Brazil, SID makes and distributes hot rolled, cold rolled, and galvanized steel products as well as tin mill products. Can’t have economic expansion without metal. 2010 revenue skyrocketed 47% over the previous year to $8.2 billion. Q1 2011 revenue was up 19% over Q1 2010, another encouraging trend. ROE is also strong with a 9 year average of 35.05%. Shares have also been beat up quite a bit of late…off 34% from their 52 week high. That’s a tidy little discount. Although many pundits have cooled on the emerging market story, SID may present a good entre to a market that was previously a bit overpriced.

The Danger
There’s no question that emerging markets have pulled back. Usually that leads to economic slowdown and that immediate pain is always felt in heavy industrial sectors like steel. A Chinese slow down will also be felt. SID also has a considerable iron ore business. Things rocked and rolled during the commodity bull. However, that trade is coming to a definitive end. Lower prices equal lower earnings. And as the wheels come off in Europe (and they will…), not only will business slow, but credit markets will again be on edge. SID carries considerable debt, around $13 billion. A bit of concern for a company with a market cap of a little more than $17 billion. Finally, although they’re ADR’s (American Depositary Receipts), foreign securities mean different rules. Latin American businesses have been nationalized overnight. Taxes are different. Lose some money in foreign equities. You’ll come to appreciate our oppressive, politburo, communist regulated securities market.

“Do tell?”

Telular Corporation (WRLS)
Recent Price: 6.23
P/E: 3.8
Current Yield: 6.42%

The Skinny
Headquartered on Chicago’s Magnificent Mile, WRLS is a tiny company ($32 million market cap) doing some big, interesting things. Their flagship product, Telguard, is an alarm monitoring system that is wireless network specific. Traditionally, home alarm system monitoring has been based on old fashioned land lines. With the rise of wireless, obviously, there was a need to fill and the company recognized it. Net income for WRLS has grown 58% YOY. No long term debt. The dividend payout ratio is a comfortable 49% and the stock trades at just 1.5 times book value. This one’s a bit of an outlier. Very under followed but very interesting. Insider buying has also perked up recently.

The Danger
Under the radar can be good. It can also be hell when doing research and trying to decide if you should throw your money at it. Trading volume is also an issue. WRLS trades a little more the 40 thousand shares on average each day. I’ve seen less liquid securities. However, you’ve got to be careful with thinly traded stuff. Always exercise good limit order discipline. Also, WRLS dividend is only a year old. So, to both WRLS holders and the company, that’s a new concept.


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