How do we prioritize companies?

People have been asking more about which companies we analyze and publish on. How do we choose?

We put all the deals into our “pipeline” spreadsheet and do an initial ranking of “high, medium or low.”

Step One: Building the Pipeline

Here are how the initial rankings are set:

High – Growth and technology companies. This includes information, bio and nano in terms of technology. Most of the companies that get a high priority right away are ones that we already know and have been waiting for. We look at every software company, nanotechnology company and most healthcare plays, especially around discovery in general and cancer in particular.

Medium – Mostly the growth oriented names we don’t know. Lots goes into medium pending a review of the company. When in doubt it goes into Medium.

Low – This is where we cut many names out of our ongoing ecosystem and future analysis. Most commodity companies go here – coal, oil, gas and mid-stream processors. Real estate trusts, commercial lending, insurance providers and banks are mostly given a low rating. This doesn’t mean they are bad investments but just ones we lack the expertise to evaluate well. There are exceptions to this rule as well. For example Everbank is one we see as a “growth financial” and Higher One (ONE) came public as a financial company but is really a technology play.

Nationality plays a role too. Foreign firms can be harder to analyse and like many investors we have discovered that the Chinese companies have an extra layer of risk and uncertainty that is getting discounted in the market. Since we are not experts on China we tend to shy away from these names right now.

The underwriting group plays a small role in the initial ranking. For example deals led by “bucket shops” are often low priority. You need to be careful though because sometimes a good opportunity can come via this channel. Ventrus Biosciences (VTUS) is one example from late 2010.

Step Two: Monitoring in Marketing

When a company reaches their marketing phase we take a much closer look. Now it comes down to fundamentals like market opportunity, company positioning and management. We capture the roadshow information for all the companies that are medium and high.

Deciding which companies to take into the research phase is based on how they stack up on all the fundamentals. There’s also an aspect of how unique they are. For example there are so many analog and 4G semiconductor companies in or coming to market most of them are not interesting.  The same is also true of some drug companies and biofuels.

Most companies survive this stage in terms of the ecosystem. Even if we are not going to do a full analysis around the IPO the company goes into our ongoing coverage ecosystem and is tracked and followed. It may get a full analysis and research note later.

Final Step: Research, Analysis and Modeling

For the companies making it to the top of the list the next step is to begin do some research and analysis on the company and build a long-term financial model which drives our Intrinsic Valuation (IV) process. Once we’ve started this process it typically results in a published note and if the company is attractive, some ongoing interest and coverage. If the valuation is compelling it also may become a name in the IPO Candy Folio.

The results of our work in full are distributed to IPO Candy subscribers first. In time we also distribute our work to institutional investors on most of the major platforms and will syndicate some (but not all) of our content to investor sites like Seeking Alpha.

Subscribers Have Power!

The IPO market ebbs and flows and sometimes we can’t get to every company we want to complete research on. In these times there are companies that are “on the bubble” and expressions of interest from our subscribers are very potent. Even one or two requests to do work M/A COM versus GCT Semiconductor can make the difference between which one gets our research focus.

So please if you are a subscriber feel free to contact us with your wishes and thoughts. We can’t promise to do every one of them right away but you drive our list!

 

 

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