HOT IPO Trader

The Hot IPO Trader
Monday, August 13, 2007
By Louis Basenese

Email – #157

This week there is only one IPO to seriously consider. Since it’s an industry pioneer with a comfortable leadership position and significant growth potential, we’ll look to participate right at the open.

Featured IPO: VMware (NYSE: VMW)

Even with the recent market volatility, VMware remains one of the most anticipated IPOs of the year. Underwriters confirmed the same last week, when they raised the pricing range a hefty $4 to $27 – $29.

Here’s what’s behind the hype…

VMware is a spin-off from EMC Corp. and is the leading provider of virtualization solutions. If you’re unfamiliar with the term, think of if as a better way to manage computer systems.

VMware’s products allow companies to separate the operating system and application software from the underlying hardware. The result is a dramatic reduction in server counts.

For instance, one customer was able to reduce its count to 80 from 1,000. Such dramatic efficiency improvements obviously translate into costs savings.

The most notable is on the capital expenditures side. But companies are also realizing utility and personnel savings, as less hardware requires less electricity and manpower to manage.

In the end, the immediate customer benefits are leading to dramatic adoption rates. Currently 100% of Fortune 100 companies and 84% of Fortune 1000 companies are using at least one of VMware’s 16 products.

This, of course, is leading to impressive financial results for VMware.

In fact, revenues soared 90% for the quarter and 95% year-to-date. And net income growth was similarly strong, up 125% for the quarter and 111% year-to-date. 

But the company is no where close to topping out…

According to IDC estimates, virtualization solutions have only penetrated 5% of the market. This estimate, though, only takes into account NEW server shipments.

The untapped market potential becomes dramatically larger when you consider –

 1. The number of servers already purchased that are not yet running virtualization  software.

 2. The natural fit for virtualization solutions in various adjacent markets, including disaster recovery, security and vulnerability management and virtual client computing.

IDC estimates the adjacent markets alone could represent as much as a $30 billion opportunity.

All things considered, it’s easy to see why Intel Capital (Intel’s investment arm) and Cisco bought into VMware pre-IPO. The company possesses a market leading disruptive technology (a technology, which when introduced, either radically transforms markets, creates wholly new markets, or destroys existing markets for other technologies) that is just gaining traction.

Here’s how we’ll look to participate in the growth…

I’m not going to wait to make a final call here since the best IPOs have only been pulling back for a few minutes after the open.

Instead, I’m recommending you buy half your normal position minutes after trading beings. Then, I’ll provide further instructions to buy the second half when an attractive dip materializes, which could be several days later.

Action to Take:

Buy VMware (NYSE: VMW) at market tomorrow. But DO NOT place a market order before trading begins. You will get an unfavorable fill.

Instead, wait for shares to trade for five to ten minutes before entering your order. Ideally, we’ll witness a slight pullback.

And remember, we’re only buying half our normal position now. I’ll provide additional buying instructions for the second half in a separate alert. 

** IPOs We’re Passing On… And Why

CCS Medical (CCSM): Distributes medical supplies to patients living with diabetes, respiratory and other chronic conditions. CCS is unprofitable, all IPO proceeds are being spent on debt reduction and net revenue growth is unimpressive.

Cumberland Pharmaceuticals (CPIX): Hold over from last week. Sells specialty pharmaceuticals to the hospital and gastroenterology markets. One of its key drugs in development, Amelior, intended for the treatment of pain and fever, already faces stiff competition from various generic versions of morphine. The company operates like King Pharmaceuticals as it makes acquisitions to bolster its pipeline. Such a strategy provides limited visibility and creates too much risk. Plus, other IPOs this week boast stronger growth prospects.

Tully’s Coffee (TULY): Hold over from last week. Operates 128 specialty retail coffee stores in the western United States and sells coffee to wholesale customers. Revenue and retail store growth unimpressive, incurred operating losses every year since inception (1992), too small an offering and unattractive industry considering 800-lb. gorilla in Starbucks.

**IPO Pipeline Report

Current Stats: 143 companies with IPO plans filed w/ SEC.

Next Week: No IPOs planned.

Deals of Interest Further Out: American Public Education.

**Portfolio Update

Airvana (Nasdaq: AIRV): No new developments.

E-House China Holdings (NYSE: EJ): Set your sell stop at $14.75.

WuXi PharmaTech (NYSE: WX): Set your sell stop at $15.75.

**Trader’s Edge

Thom M. writes, “I went ahead and bought LULU @ $29.00 and sold half my shares @ $36.00… It wasn’t such a bad idea after all. 24% in 2 weeks, not too shabby. Too bad it wasn’t one of your pics to buy, although you did mention it. I know we can’t all be right all the time.”

First let me say this – if a 24% gain in two weeks only ranks as “not too shabby,” I probably don’t want to know what it would take to earn a more celebratory label, like “unbelievable” or “spectacular.”

More seriously, though, Thom raises an important point… that I won’t be right all the time. And I completely agree.

With more than 200 IPOs a year, there’s no way to get them all right. Accordingly, I hope you treat my analysis as a resource (and hopefully one of your better ones), not the definitive word on every deal.

And should your own research, or expertise, lead you to a different conclusion regarding a particular IPO, I encourage you to act on it. For Thom, doing so was a profitable decision.

The only suggestions I have for such situations is to stick to our profit taking discipline, which Thom wisely did.

(Remember, if you have any questions, comments or successes you would like to share, feel free to drop us a line at editor@oxfordclub.com. We’ll do our best to address each one.)

Good investing,

Louis Basenese

Stock
Rec
Date
Rec
Price
Current Price
Comments

Vmware (NYSE:VMW)
New
New
Buy
Buy after shares start trading.

WuXi Pharmatech (NYSE: WX)
08/09/2007
$18.50
$20.00
Buy. Set sell stop at $15.75.

E-House China Holdings (NYSE: EJ)
08/09/2007
$17.50
$17.55
Buy. Set sell stop at $14.75.

Airvana (Nasdaq: AIRV)
7/25/07
$7.20
$7.00
Buy. Sell stop is $6.

Investor Bulletin